China's central bank issued a notice Tuesday formalizing rules on yuan-denominated foreign direct investment (FDI) in the mainland, China Business News reported.
The notice also announced that yuan-based FDI, which was introduced in the second half of last year, has entered trial operation.
All overseas businesses can apply to bring their accumulated yuan from the offshore market back to the Chinese mainland through direct investments, including the founding of new companies, mergers and acquisitions and providing loans on the mainland. However, they are still forbidden from investing in restricted industries and sectors under the nation's control, according to the notice. Experts said it is a big step for the nation toward internationalizing its currency, and may promote cross-border yuan trade settlements.
Ma Jun, Deutsche Bank's chief economist in China, said in a report that it is the first time for the central bank to formalize its yuan-based FDI rules. The People's Bank of China introduced the program last year, but did not release any clear guidelines. Ma expected the notice to trigger more companies to issue yuan-dominated bonds – also known as "dim sum" bonds in Hong Kong – if more details on the program are issued in the near future.
So far, Hong Kong is a key market for yuan-based transactions. China has opened up Hong Kong as an offshore venue for investors to gain access to renminbi-denominated assets, allowing foreign companies and banks to raise funds in renminbi for cross-border trade and investment. However, any issuer of such debt still needs to get government approval to bring that money back to the mainland, which could be a complicated and obscure process.
Analysts expected more specific rules on the offshore yuan-based transactions to be issued before the end of this year, which may provide a greater degree of certainty and easier access to investors when they have renminbi funding in Hong Kong and elsewhere.
"Dim sum" bond sales in Hong Kong may increase to 200 billion yuan (US$31 billion) in 2011, from 37.5 billion yuan last year, as global investors bet on the yuan appreciating more than the currencies of Brazil, India and Russia, according to an estimate from Mizuho Securities Asia Ltd. Dim sum bond issuance has reached 68 billion yuan so far this year, Bloomberg reported.
The notice, which also aims at curbing speculative capital flows, formulated strict procedures for overseas non-financial businesses doing yuan-based FDI in offshore markets, and required overseas banks doing such transactions to be backed by trade settlements or business needs. Meanwhile, settlements must be made within three months of the transaction, according to the notice.
While taking a number of steps to promote the offshore trading of the yuan and to make it an international currency, Chinese regulators also continue to fight the inflow of hot money, which aims to take advantage of the yuan's appreciation. The yuan has gained 2% this year versus the US dollar to 6.47 as of Tuesday.
Yuan-based trade settlement totaled 360 billion yuan (US$55 billion) in the first quarter, Xinhua news agency reported, citing the central bank. That's 15 percent more than the final quarter of 2010 and almost 20 times higher than a year earlier.
