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Cover Stories Series 2012> Financing Tangible Growth> Archive
UPDATED: January 27, 2011 NO. 5 FEBRUARY 3, 2011
Yuan Sets Sail
Wide use of the yuan in direct investment overseas marks a step toward a fully convertible currency

IT'S SHOW TIME: Visitors look at a Haier booth at the 2011 International Consumer Electronics Show in Las Vegas, in January 2011. Haier is one of the first few Chinese companies that have an overseas foothold (ZHU LIYI)

In its first document of the year, the People's Bank of China, the central bank, outlined new measures for a pilot program to allow non-financial enterprises to use the yuan, also called the renminbi, in settlement while making investments in overseas markets. For foreign entrepreneurs, this means they can get funding denominated in the currency of China—one of the most dynamic economies in the world.

According to the central bank's measures, non-financial enterprises incorporated in areas where pilot programs of yuan settlement in cross-border trade have been launched are permitted to participate in the new scheme. These areas include Shanghai, Beijing, Chongqing, and Tianjin municipalities; Guangdong, Liaoning, Jilin, Heilongjiang, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Hainan, Sichuan, and Yunnan provinces; and Inner Mongolia, Guangxi Zhuang, Tibet and Xinjiang Uygur autonomous regions.

The measures allow investors to use the yuan in direct investments in overseas enterprises or projects where the aim of the investment is to acquire full or partial ownership or actual control of the enterprise or project, whether by way of merger, acquisition, equity participation or otherwise.

In the past, Chinese enterprises had to exchange the yuan for U.S. dollars before investing overseas. The Ministry of Commerce's statistics show that domestic investors made outbound direct investments (ODIs) in 3,125 overseas companies in 129 countries and regions in 2010, with total non-financial ODI reaching $59 billion, growing 36.3 percent year on year. In the past five years, the aggregated amount of ODI from China totaled $216.6 billion.

Guo Tianyong, a banking professor at the Central University of Finance and Economics, said against the backdrop of the yuan's appreciation, most foreign entrepreneurs are eager to get yuan investment and domestic enterprises will be more willing to invest overseas after the measures are adopted.

Fully prepared

Managers at domestic and foreign banks have all stated the yuan payment and settlement systems are prepared and are readily available for customers.

Li Ru, an account manager of the Beijing Branch of the Bank of China, said in 2009 China allowed yuan settlement in foreign trade, which provided experience for its use in ODI practice.

According to the measures, before remitting any yuan funds out of China—whether in relation to the direct investment or pre-investment expenses—investors must register the remittance with local bureaus of the State Administration of Foreign Exchange. For the purpose of registration, investors are required to submit the approval letter issued by, or, in the case of remittance of pre-investment expenses, the application document for the proposed overseas investment to, the relevant Chinese authorities in charge of approving the outbound investment. After the registration, investors can remit the yuan funds, domestic banks can also provide yuan-denominated loans to the investors' ODI projects. Profits that investors obtain in overseas investments can also be remitted back to China in the form of yuan.

Montgomery Ho, managing director with commercial banking of HSBC Bank (China), said China has made remarkable progress in ODI. Judging by the global scale, China has become the fifth largest source of ODI and China's ODI is expected to grow at an annual rate of 40-50 percent.

At present, nearly 90 percent of Chinese ODIs have been invested in emerging markets, which also have the most potential in the need of the yuan. Ho believed the measures will also help satisfy the emerging markets' increasing demand for the yuan settlement in cross-border trade.

A step forward

Allowing yuan settlement in ODI, Guo said, will help avoid settlement risks brought about by the third-party currency—like the U.S. dollar. More importantly, the measures will spur convertibility of the yuan under the capital account of the balance of international payments, and will bring positive influence on the yuan's internationalization.

Guo said in the past, efforts have been mainly made in trade areas. On July 2, 2009, the central bank issued the Administrative Rules on the Pilot Program of Renminbi Settlement of Cross-border Trade, the official launch of yuan settlement in cross-border trade. Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan were the first five pilot cities and overseas regions were limited to Hong Kong and Macao special administrative regions and ASEAN countries. On June 22, 2010, the central bank said the program would be expanded to 20 provinces, municipalities and autonomous regions (mentioned above) and there would be no restrictions on overseas destinations.

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