If you are planning to use foreign funds (including US dollars, Japanese yen, RMB, etc.) to invest in China, the investment must comply with relevant foreign exchange management regulations in China. Today, I would like to share with you the requirements and procedures for overseas investors (including Hong Kong and Macao) to invest in domestic enterprises (FDI)in China using overseas funds(including US dollars and other currencies,) This article takes approximately 5 minutes to read and is divided into the following five parts:
1、 What is RMB FDI
2、 Establishment Methods for Foreign Invested Enterprises
3、 The Positive Impact of RMB FDI on Foreign Enterprises
4、 Under what circumstances do I need to register for RMB FDI
5、 How to handle FDI registration
What is RMB FDI
FDI, also known as Foreign Direct Investment, is one of the main forms of modern capital internationalization. According to Article 2 of the Regulations on the Administration of Foreign Exchange for Domestic Direct Investment in China by Foreign Investors, FDI refers to the act of foreign investors (including overseas institutions and individuals) establishing foreign-invested enterprises or projects in China through new establishment or M&A, obtaining ownership, control, and management rights of the enterprises or projects.
In 2011, the Ministry of Commerce in China announced that it would implement multiple measures aimed at promoting the flow of RMB from Hong Kong to the mainland, including encouraging foreign enterprises to use overseas RMB for direct investment in the mainland (RMB FDI).
Establishment Methods for Foreign Invested Enterprises
There are various ways for foreign-invested enterprises to be established, and the key points of regulatory review by the State Administration of Foreign Exchange for different establishment methods, as well as the registration and changes of foreign-invested enterprises vary. The table below assumes that overseas investors just invest in foreign exchange or RMB, without involving physical or intangible asset investments.
Establishment Methods | description |
Cross border greenfield investment (non round tripping investment) | The most common and simplest form of establishment of foreign invested enterprises |
Acquisition of equity in Chinese domestic companies | Transfer of equity of a domestic enterprises by original Chinese shareholders to foreign investors and the registered capital of the enterprises has not yet been contributed before the equity transfer. |
Transfer of equity of a domestic enterprises by original Chinese shareholders to foreign investors and the registered capital of the enterprises has been contributed by the original Chinese owner before the equity transfer. | |
Re-Merger or Division of original foreign-invested enterprises | Foreign-invested enterprises establish new enterprises due to merger or division. |
Reinvestment | Foreign investors reinvest their RMB profits in China to establish new enterprises. |
Foreign investors use their income from equity transfer, capital reduction, advance recovery, liquidation, etc. in China for reinvestment |
RMB FDI has positive impacts on foreign-invested enterprises.
For overseas investors who invest in China, the most direct benefit of implementing RMB FDI is to help reduce exchange rate risks in investment. In the past, overseas funds investing directly in China must be in foreign currencies such as US dollars, Japanese yen, and Hong Kong dollars; whether during the waiting period for approval by the Chinese authorities or in the early stages of project operation, temporarily idle investment funds may shrink due to RMB appreciation. During the operation of investment projects, The foreign currency capital injected by investors is usually not converted into RMB at one time, but settled with authorized banks in stages and batches according to actual needs. if the project has a long time span and the RMB exchange rate continues to rise during this period, investors will inevitably suffer losses from exchange rate fluctuations, or even go beyond budget. Overseas investors can use RMB to invest directly in China, which can effectively avoid exchange rate risks and save the procedures for converting foreign exchange into RMB, to some extent making fund scheduling more convenient and efficient.
On the other hand, there is a certain interest spread between RMB deposits in mainland China and Hong Kong. If companies use the RMB raised in Hong Kong for direct investment projects in the mainland, they can not only obtain the benefit of lower financing costs, but also enjoy higher interest income than in Hong Kong if the investment funds are temporarily deposited in mainland banks. If Hong Kong businesses borrow RMB from banks in Hong Kong for direct investment, the terms and ease of financing are believed to be superior to loans in Hong Kong dollars.
Under what circumstances is RMB FDI registration required?
Under the requirements of the "Announcement on Issues Related to Cross-border RMB Direct Investment" (Ministry of Commerce Announcement No. 87, 2013), foreign investors (including those from Hong Kong, Macao, and Taiwan) can use legally obtained overseas RMB to carry out new business establishment, capital increase, equity participation, or merger and acquisition of domestic enterprises in China through direct foreign investment activities. Foreign investors shall go through relevant formalities for cross-border RMB direct investment in accordance with the current laws, administrative regulations, rules, and policies of the state on foreign investment in China. In short, if foreign investors want to use overseas RMB to invest in domestic enterprises in China, they need to go through FDI registration procedures.
At the same time, the above announcement requires that foreign-invested enterprises may not use the funds invested through cross-border RMB direct investment to directly or indirectly invest in securities and financial derivatives within China (except for listed companies under strategic investment), or to be used for entrusted loans.
How to handle FDI registration?
According to the "Measures for the Administration of RMB Settlement Business for Foreign Direct Investment" (〔2011〕 No. 23) and the "Notice of the People's Bank of China on Clarifying the Operating Rules for RMB Settlement Business of Foreign Direct Investment", specific operating procedures have been provided for banks to handle RMB settlement business for foreign direct investment. Currently, when foreign-invested enterprises apply for corporate basic accounts and foreign exchange accounts at their registered local banks in China, if overseas RMB is involved in the process, the opening bank is responsible for handling FDI registration. Enterprises only need to fill in the "Application Form" and provide relevant supporting documents as required by the bank.
In conclusion, against the backdrop of the complex international situation, foreign capital inflows continue to increase, indicating that China remains the most valuable market for investment.