• Administrative Measures on Renminbi Bank Settlement Accounts Opened by Overseas Entities
  • November 9, 2010 | Authors: John V. Grobowski; Yiqiang Li; Wendy Yan
  • Law Firm: Faegre & Benson LLP - Shanghai Office
  • Seeking to further liberalize the use of China's Renminbi (RMB)by foreign entities for settlement of transactions in China, the People's Bank of China (PBOC) has enacted rules allowing foreign entities to open bank accounts that can be used to accept and make payments in RMB. The Administrative Measures on Renminbi Bank Settlement Accounts Opened by Overseas Entities (Measures on RMB Accounts of Overseas Entities), which were enacted on September 29, 2010, establish rules nationwide for the administration and oversight of RMB bank settlement accounts owned by overseas entities. By enabling foreign entities to accept and make payments in RMB—rather than having to convert to a foreign currency—the new measures should make it somewhat easier and more efficient for foreign entities to do business in China.

    The Measures on RMB Accounts of Overseas Entities are broadly subject to the PBOC's Measures on Administration of Renminbi Bank Settlement Accounts (RMB Bank Settlement Account Measures), which became effective September 1, 2003, as well as the detailed implementing rules for the RMB Bank Settlement Account Measures, enacted January 2005.

    Background

    China has allowed the use of RMB for cross-border trade settlements on a limited basis since July 2009, under the umbrella of the PBOC's Administrative Measures on a Pilot Program for Renminbi Cross-Border Trade Settlement. These groundbreaking rules have allowed a select group of domestic enterprises to engage in import and export business with foreign companies using transactions settled in RMB. Compared to transactions settled in foreign currency, trades settled in RMB involve simpler import/export procedures in terms of both foreign exchange and customs. Exports were also entitled to tax credits.

    Shanghai and Guangdong likewise began allowing foreign companies to set up RMB bank settlement accounts on a pilot basis in December 2009, enabling those companies to accept RMB domestically from their Chinese trading partners.

    General Provisions

    The Measures on RMB Accounts of Overseas Entities apply to all RMB bank settlement accounts opened by overseas entities in domestic banks. In these new measures, an overseas entity is defined as one that is legally incorporated overseas, including in Hong Kong, Macau, and Taiwan. The term domestic bank refers both to domestically funded banks and foreign-funded banks that have the necessary qualifications to handle international settlement business in China.

    The Measures on RMB Accounts of Overseas Entities are not applicable to the following four types of bank accounts:

    ¦RMB bank settlement accounts opened domestically by the central bank or monetary authority of a foreign country for currency swaps.
    ¦Inter-bank transaction accounts opened domestically by a foreign bank for clearance or settlement services.
    ¦RMB special accounts opened domestically by a Qualified Foreign Institutional Investor for domestic investments in securities.
    ¦RMB special accounts opened domestically by a foreign central bank or monetary authority, an RMB clearing bank in Hong Kong or Macau, or a foreign bank handling cross-border settlements for investments in the inter-bank bond market.

    The People's Bank of China is the regulatory agency responsible for the administration and oversight of RMB bank settlement accounts owned by overseas entities, including the opening, operation, changes to, and cancelations of such accounts.

    Requirements for Opening an RMB Bank Settlement Account by Overseas Entities

    Any overseas entity that engages in the lawful collection and payment of Renminbi may at its own discretion choose a domestic bank to apply to open an RMB bank settlement account. Banks are directed by the Measures on RMB Accounts of Overseas Entities to mark each such account as a "Non-Resident Account" (NRA). Documents required for the opening of such an account include an application form, the certificate of incorporation of the overseas entity, and the specific rules, regulations, or approval documents issued by Chinese lawmakers or policymakers that allow the individual overseas entity to conduct activities inside China that require the ability to settle transactions using RMB.

    After the domestic bank and the local PBOC branch have reviewed a foreign entity's application documents, the PBOC branch will issue a license for the opening of a basic deposit account. In accordance with the RMB Bank Settlement Account Measures, basic deposit accounts are to be used for day-to-day transfers, settlements, deposits, and withdrawals of cash. Each foreign entity or individual may own only one basic deposit account.

    Foreign entities are to use such basic deposit accounts for making and receiving payments in RMB. The Measures on RMB Accounts of Overseas Entities explicitly prohibit the deposit or withdrawal of cash to or from an RMB bank settlement account that is owned by an overseas entity, unless the deposit or withdrawal of cash is necessary and approved by the PBOC.

    It is unclear under these new measures whether overseas entities are entitled to open "general" deposit accounts in addition to basic deposit accounts. Under the RMB Bank Settlement Account Measures, an entity or individual may apply with banks other than the one that holds its basic deposit account to establish general deposit accounts. Such general deposit accounts can be used for broader purposes, such as cash deposits, loan payments, and other purposes.

    RMB funds held in the RMB bank settlement account of an overseas entity may not be converted into foreign currency.

    Conclusions

    By allowing overseas entities to establish RMB bank settlement accounts in China, the Chinese government has taken another step towards internationalization of the Renminbi. The Measures on RMB Accounts of Overseas Entities make it possible for foreign companies trading with Chinese partners to hold and disburse RMB funds domestically. As such, the new rules should help foreign companies reduce the expenses of currency conversion and avoid risks associated with foreign exchange rate volatility.

    It is noteworthy that Shanghai, China's financial center, has been spearheading the nation's RMB cross-border settlement business. In addition to pioneering RMB bank settlement accounts for foreign companies in late 2009, the Shanghai government recently reaffirmed its support for foreign-owned RMB settlement accounts by simplifying procedures for the opening of accounts and expanding the allowable sources and scope of use of RMB funds.