Renminbi-denominated Inward Direct Investment
Gets Underway in China
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets ResearchI.

New source of direct investment in China

1. Growing direct investment in China
Foreign direct investment in the emerging economies has continued because of
their continuing high rate of economic growth and despite the global financial crisis
that started in 2008 and the European debt crisis that started in 2011. In particular,
direct investment in China, which declined in 2009 to $90.0 billion as a result of the
fallout from the collapse of Lehman Brothers after reaching $92.4 billion in 2008,
increased to $105.7 billion in 2010 and reached $95.0 billion in the first 10 months of2011 (Figure 1)1.
Japanese direct investment in China has also increased, from $4.1 billion in 2009,
to $4.2 billion in 2010 and $5.5 billion in the first 10 months of 2011, making Japanthe third-largest direct investor in China after Hong Kong and Taiwan (Figure 1).
According to Japanese (balance of payments) statistics (from the Ministry of Financeand the Bank of Japan), Japanese (net) direct investment in China reached ¥205.2
billion in Jan–Mar 2011 and ¥223.7 billion in Apr–Jun 2011, a total of ¥428.9 billion.
When compared with the figures for the first half of 2010 (¥87.2 billion in Jan–Mar
and ¥137.5 billion in Apr–Jun, a total of ¥224.7 billion), this shows how strong the
momentum of growth was in 2011.

2. Renminbi-denominated direct investment in China
Companies investing directly in China were traditionally subject to investment
limits and minimum capital requirements for each investment as well as having toremit foreign exchange (e.g., yen or US dollars) that they then had to convert torenminbi in China. However, having to convert foreign exchange entails not only
administrative inconvenience and costs but also risk. In order to avoid this, foreigncompanies could, in theory, issue renminbi shares or bonds on mainland Chinese
capital markets. In practice, however, the only non-residents allowed to do this are
1

In November 2011 inward direct investment in China declined by 9.8% year on year to$8.76 billion in the first year-on-year decline since July 2009. The figure for Jan–Nov 2011
was $103.8 billion.

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Figure 1: Geographical breakdown of inward direct investment in China
2009
Ranking Country/region

2010
Actual investment$mn

Share (%)

Ranking Country/region

2011 (Jan–Oct)
Actual investment$mn

Share (%)

Ranking Country/region

Actual investment$mn

Share (%)

1

Hong Kong

53,99360.0

1Hong Kong

67,47463.8

1

Hong Kong

62,363

65.6

2

Taiwan

6,563

7.3

2

Taiwan

6,701

6.3

2

Taiwan

5,852

6.2

3

Japan

4,117

4.6

3

Singapore

5,657

5.3

3

Japan

5,482

5.8

4

Singapore

3,886

4.3

4

Japan

4,242

4.0

4

Singapore

4,763

5.0

5

US

3,576

4.0

5

US

4,052

3.8

5

US

2,567

2.7

6

Korea

2,703

3.0

6

Korea

2,693

2.5

6

Korea

2,186

2.3

7

UK

1,469

1.6

7

UK

1,642

1.6

7

UK

1,477

1.6

8

Germany

1,227

1.4

8

France

1,239

1.2

8

Germany

998

1.1

9

Macau

1,000

1.1

9

Netherlands

952

0.9

9

France

724

0.8

10

Canada

959

1.1

10

Germany

668

0.7

(cf.)

EU

5,952

6.6

(cf.)

EU

Global total

90,033100.0

Global total

933

0.9

10

Netherlands

6,589

6.2

(cf.)

EU

5,508

5.8

105,740

100.0

Global total

95,012

100.0

Note:

1. Ranking is by actual investment.
2. Inward direct investment from Hong Kong and tax havens includes round trip
investment.
3. The EU has 27 members.
Source: Nomura Institute of Capital Markets Research, from Chinese Ministry of Commerce datainternational financial organizations, while the only residents are a limited number of
locally incorporated financial institutions.
As a result, there has been considerable interest in the possibility of raising capitalon Hong Kong's offshore renminbi market and remitting the proceeds to mainland
China: in other words, in renminbi-denominated inward direct investment. The rest of
this report deals with the rules governing this and examples of it as well as with Hong
Kong as a source of renminbi funds and the role Japanese financial institutions could
play in this.

II. Lifting of ban on inward direct investment in renminbi
1. Trial period for inward direct investment in renminbi1) Obtaining permission from local authorities to open a non-resident’s
renminbi account
The Chinese authorities first allowed the renminbi to be used to settle tradetransactions on a limited scale in July 2009. At that stage the scheme was limited to
Shanghai and four cities in Guangdong on the Chinese side, and to trade with Hong
Kong, Macau, and ASEAN on the other. Later, in 2009, as the demand grew to invest
renminbi acquired outside mainland China otherwise than as a result of trade,
Shanghai and Guangdong announced rules governing the opening of renminbi
accounts by non-residents to enable such renminbi to be invested directly in China.

Renminbi-denominated Inward Direct Investment Gets Underway in China

22) Announcement of rules by three government organizations
The Ministry of Commerce (MOFCOM) is responsible for regulating the formationof companies as a result of direct investment in China. However, in the absence of any
central government rules governing inward direct investment in renminbi, MOFCOM
announced a Notice on the Work of Administration of Foreign Investments on 25
February 2011 to clarify the position regarding inward direct investment in renminbi.
The responsibility for regulating cross-border capital transactions in renminbi
between mainland China and other countries now lies with the People’s Bank of
China (PBOC), while the State Administration of Foreign Exchange (SAFE) is
responsible for regulating mainland Chinese bank accounts funded by cross-borderrenminbi transactions. Following the aforementioned notice, SAFE's General Affairs
Department issued a Notice on Issues Related to the Standardization of the Business
Operations of Cross Border Renminbi Capital Account Items on 7 April 2011, while
the PBOC issued a Circular on Clarifying Relevant Issues Regarding Cross-Border
RMB Business on 3 June 2011.

3) Different application of rules by local authorities
Each of the above three notices gives clear instructions on how to proceed in orderto open a renminbi transaction account for inward direct investment, be it in the formof an equity stake, a capital increase, M&A or a parent/subsidiary loan). However, as
this was still officially a trial period for inward direct investment in renminbi, there
were differences in the way the notices were interpreted and applied by the local
offices of the government departments concerned when foreign companies actuallyapplied to open accounts. In some cases, it was unclear whether an application would
be accepted or, even if it was, how long the application might take.
Because of the significance of inward direct investment in renminbi as a means ofboth enabling renminbi to be repatriated, especially from Hong Kong, and promoting
the development of Hong Kong’s offshore renminbi market, a subject touched on inVice Premier Li Keqiang’s Hong Kong speech on 16 August 20112, it has given rise toa series of new rules and regulations.

4) New rules and regulations
The first of these was a draft Notice on Issues Concerning Cross-Border Renminbi
for Foreign Direct Investment, issued by MOFCOM for public comment on 22 August
2011. This was followed on 12 October 2011 by a final version of the same notice(“MOFCOM’s notice”), while, on 13 October, the PBOC announced Measures for the2

See Sekine, Eiichi, "Honkon Kin'yuu Saabisugyou no Shinkou o Hakaru Chuugoku
Kokumuin Li Kokkyou Fukusouri no Supiichi" (Vice Premier Li Keqiang's Hong Kong
Speech as a Move to Stimulate Hong Kong's Financial Services Industry), Kikan
Chuugoku Shihon Shijou Kenkyuu, 2011 Autumn edition, Tokyo Club Foundation for
Global Studies (in Japanese).

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Administration of Renminbi Settlement Matters Relating to Foreign Direct Investment(“PBOC's administrative measures”). Both sets of rules were promulgated on 14
October 2011 with immediate effect. They mark the transition of inward direct
investment in renminbi from trial status to normal status.

2. Main features of new rules and regulations
The main features of MOFCOM’s notice and the PBOC’s administrative measures
are as follows.

1) Definition of “inward direct investment in renminbi”
MOFCOM’s notice refers to “inward direct investment in renminbi” as “crossborder foreign direct investment in renminbi” and defines it as “direct investment
made by foreign investors according to Chinese law using offshore renminbi funds
legitimately obtained.”
Companies formed in mainland China by foreign companies are known as“foreign-invested enterprises” in China. The direct investment referred to in
MOFCOM’s notice includes the formation of, and capital increases by, suchenterprises as well as acquisitions of Chinese companies and the acquisition ofChinese equity in cooperative joint ventures.

2) Source of renminbi used in inward direct investment
MOFCOM’s notice defines “offshore renminbi funds” as follows.
The first definition is renminbi funds obtained offshore by foreign investors,
including (1) renminbi payments for cross-border trade transactions and (2) renminbi
funds received legitimately from profits distributed by foreign-invested enterprises
and repatriated by foreign investors; renminbi payments received by foreign investors
from transfers of their equity/share holdings in such enterprises; renminbi repaymentsfrom a reduction in the registered capital of such enterprises; asset liquidation
proceeds in renminbi from such enterprises; and investments recouped in renminbi byforeign investors ahead of the Chinese investors from Sino-foreign cooperative joint
ventures.
The second definition includes, non-exhaustively, legitimately obtained proceedsfrom offshore issuance of renminbi bonds or shares.
MOFCOM's notice says the rules are intended to "facilitate” inward direct
investment using renminbi obtained legitimately, be it on shore or off shore. Anotherfeature of these rules, as we will see, is that they would allow not only dim sum bonds(i.e., renminbi bonds issued in Hong Kong, see below) but also renminbi loans madein Hong Kong to be used to fund such inward direct investment.

Renminbi-denominated Inward Direct Investment Gets Underway in China

4

Figure 2: Procedure for checking applications to invest directlyin China using renminbi(Application documents)

Foreign investor(1) Statement and certificate of origin of renminbi funds(2) Statement of proposed use of renminbi funds(3) Statement of cross‐border renminbi direct investment

MOFCOM grants approval of cross‐border renminbi direct investment.

MOFCOM

MOFCOM regional office(Cases where applications are checked
centrally)

Offshore investors are allowed to open a "non‐resident’s renminbi
account."(Special account for early‐stage costs and special account for renminbi
reinvestment)(1) The proposed investment is RMB300mn or
more.
(2) The business of the foreign‐invested
enterprise involves financial guarantees,
financial leasing, microfinance or auctioning.

Application to form company

Enables use of capital(3) The foreign‐invested enterprise is aninvestment company, venture capital or private
equity investment enterprise.
(4) The foreign‐invested enterprise is inindustries subject to state regulation, such as
cement, iron and steel, electrolyzed aluminumand shipbuilding.

PBOC regional branch(Registration of company details)

Firm of accountants checks thatinvestment has been made

PBOC regional branch(Open resident’s renminbi
account)

Investment remitted to special
renminbi capital account

The foreign investor opens a special renminbi
capital account in the company name.
The Chinese shareholders open a special renminbi
M&A account and a special renminbi equity
transfer account.

Source:Nomura Institute of Capital Markets Research, from MOFCOM and PBOC data

3) Procedure for checking applications to invest directly in China using
renminbi
The fact that MOFCOM’s notice and the PBOC’s administrative measures both
stipulate the procedure that foreign investors must follow from forming a company to
opening an account is an indication of the Chinese authorities’ desire to “facilitate”
inward direct investment (Figure 2).
First, foreign investors have to apply to their local MOFCOM office to be allowed
to invest directly using renminbi. If the local MOFCOM office grants approval, theforeign investors use the approval document to apply to set up the company.
Second, once a business license has been granted and the (foreign-invested)company formed, the foreign investors have to register the details of their company attheir local PBOC branch. With the approval of their local PBOC branch the foreign
investors can now open a special renminbi capital account in the company name attheir bank.

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Third, once the foreign investors have remitted renminbi from an offshore accountto their special renminbi capital account and had the remittance certified by anaccountant as a payment of equity, they can access the renminbi in the account.

4) Points to note about use of renminbi in inward direct investment
Although, as we have seen, the above procedures facilitate the use of renminbi ininward direct investment, there are certain restrictions on how the funds may be used.
First, the restrictions on how the funds may be used. MOFCOM's notice prohibits
the use of inward direct investment using renminbi for (1) investing, directly or
indirectly, in either securities or financial derivatives and for (2) lending via banks. As
the rules assume that the direct investment will be used for non-speculative purposes,
these are perfectly reasonable restrictions.
Second, in some cases, approval must be obtained from MOFCOM in Beijing
rather than one of its local offices. There are four such cases: (1) when the investment
is RMB300 million or more; (2) when the business of the foreign-invested enterprise
involves financial guarantees, financial leasing, microfinance or auctioning; (3) when
the foreign-invested enterprise is an investment company, venture capital or private
equity investment enterprise; and (4) when the foreign-invested enterprise is inindustries subject to state regulation, such as cement, iron and steel, electrolyzed
aluminum and shipbuilding. MOFCOM's desire to scrutinize cases involving large
projects, finance, regional headquarters, or companies in overheated industries isapparent.
With regard to the real estate sector, sometimes taken as an example of an
overheated industry, MOFCOM's notice says that "cross-border renminbi direct
investment in the real estate industry should be done in accordance with theadministrative regulations governing foreign investment currently in force." We takethis to mean that MOFCOM in Beijing still also has the discretion to decide on
matters regarding real estate.

3. Registration of "foreign debt" also required for inward direct investmentusing renminbi
1）Rules governing foreign-invested enterprises' borrowing limits
Capital transactions in China are still subject to certain restrictions, including
restrictions on the size of foreign-invested companies in China and the sectors inwhich they may operate. As far as the former (company size) is concerned, foreigninvested enterprises need to meet the requirements for "total investment amount" (thetotal of the shareholders' equity, or capital, needed to start up a locally incorporated
company and that company's debt) (Figure 3).

Renminbi-denominated Inward Direct Investment Gets Underway in China

6

Figure 3: Schematic diagram of rules governing total investment amountand foreign debt

“Total investment amount”“Amount borrowed” (= foreign debt limit)
・ Local loan guaranteed by parent company
・ Parent/subsidiary loan
“Registered capital”

Note:

1. Total investment amount - registered capital = amount borrowed (i.e., foreign debt limit).
2. Foreign debt limit = short-term (12 months or less) outstanding foreign debt + medium-term(more than 12 months) cumulative accrued foreign debt.
3. Loans from a local financial institution guaranteed by a borrower's parent company are
regarded as foreign debt when they are repaid.
Source: Nomura Institute of Capital Markets Research, from a variety of sources

Figure 4: Minimum capital requirements for foreign-invested enterprises
Total investment amount

Minimum ratio of registeredcapital to total investment$3mn or less70%

$3–10mn50%$10–30mn

40%More than $30mn

Source:One-third or more

Provisos−However, minimum registered capital of $2.1
million required if total investment $4.2 million or
lessHowever, minimum registered capital of $5.0
million required if total investment $12.5 million or
lessHowever, minimum registered capital of $12.0
million required if total investment $36.0 million or
less

Nomura Institute of Capital Markets Research, from a variety of sources

Furthermore, foreign-invested enterprises have to meet certain minimum capitalrequirements that depend on their total investment amount (Figure 4). Once acompany's total investment amount and capital have been decided, the difference
between them is its "debt." Any liabilities that a company incurs must not exceed its
borrowing limit.

2) Requirement for a foreign-invested enterprise to register its "foreign debt"
If a foreign-invested enterprise's debt is funded by means of a parent/subsidiaryloan from an offshore parent company, it is regarded as "foreign debt." In China,
foreign debt (i.e., foreign currency owed to non-residents by Chinese organizations) ismonitored by a number of authorities (the State Development and Reform
Commission, the Ministry of Finance or SAFE), depending on the borrower.
Foreign-invested enterprises are required to register any foreign debt with their
SAFE branch within 15 days of signing a loan agreement. In addition, foreigninvested enterprises' foreign debt is subject to the following restrictions (Figure 4).

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

(1)Foreign debt incurred by foreign-invested enterprises must not normallyexceed the difference between their officially approved total investment
amount and registered capital (i.e., their borrowing limit).

(2)

Medium- and long-term foreign debt (with a maturity of more than 12
months) is calculated on a cumulative accrual basis. Short-term foreign
debt (with a maturity of not more than 12 months) is calculated in terms ofbalances.

(3)

Loans from a local financial institution (including local Chinese branches
of Japanese banks) guaranteed by a borrower's parent company are
regarded as foreign debt when they are repaid.

(4)

If a foreign-invested enterprise borrows more than the difference between
its total investment amount and its registered capital, the agency thatoriginally approved it must reassess its total project investment amount.

3) Registration of foreign debt in the case of inward direct investment using
renminbi
During the aforementioned trial period for inward direct investment in renminbi,
foreign debt in the form, for example, of parent/subsidiary renminbi loans also had tobe registered. Initially, SAFE's Shanghai bureau issued a notice on the subject on 14
January 2011.
Then, on 7 April 2011 (see above), SAFE's General Affairs Department issued a
Notice on Issues Related to the Standardization of the Business Operations of Cross
Border Renminbi Capital Account Items. This confirmed that renminbi-denominatedforeign debt would be dealt with according to the existing rules on foreign debt.
Under MOFCOM's notice and the PBOC's administrative measures, both ofOctober 2011, the approval that had to be sought from the PBOC for renminbi foreign
debt during the trial period was no longer required, and renminbi foreign debt wasallowed to be registered in the same way as foreign currency foreign debt. However,
because neither SAFE, MOFCOM, nor the PBOC issued any new regulations,foreign-invested enterprises still need to obtain the approval of their local SAFE
office under the April 2011 notice.

III. Hong Kong's offshore renminbi market as a source of funds
1. Issuing renminbi bonds in Hong Kong
The renminbi deposit accounts that provide the funds for Hong Kong's offshore
renminbi market have been available to tourists from the Chinese mainland since2004. Since July 2009, when it first became possible to use renminbi to settle tradetransactions, these deposits have risen sharply, from RMB55.9 billion as of end-July

Renminbi-denominated Inward Direct Investment Gets Underway in China

8

Figure 5: Issuance of dim sum bonds and diversification of issuers
Issuers

Year

Residents
Policy banks (China Development Bank, Export-Import Bank―of China)

2007

Non-residents

Issue amount(RMB100mn)
100

State-owned commercial banks (Bank of China, etc.)
2008
2009

Policy banks, state-owned commercial banks―

Chinese government (Ministry of Finance)

―

120
160

Policy banks, state-owned commercial banks
Foreign banks (HSBC, Bank of East Asia)
Chinese government (Ministry of Finance)
Policy banks, state-owned commercial banks

2010

Non-financial companies (Hopewell Holdings, McDonald's,
etc.)

357.6

Financial institutions (UBS, ANZ)
Policy banks, state-owned commercial banks

International financial organizations (World Bank, IFC, AsianDevelopment Bank)

Non-financial companies (Baosteel Group)

Government-backed financial institutions (Korea EximBank)

Chinese government (Ministry of Finance)
2011

868

Non-financial companies (YFY, Volkswagen, etc.)
Financial institutions (ICBC Asia)

Note:
Source:Data for 2011 to 8 December.
Nomura Institute of Capital Markets Research, based on data from the Securities andFutures Commission of Hong Kong and other sources

2009 to RMB622.2 billion as of end-September 2011. (As of end-October 2011 theystood at RMB618.5 billion, down RMB3.7 billion from the previous month.)
One of the possible investments for these funds is the renminbi bonds thatmainland Chinese entities have been allowed to issue on Hong Kong's offshore
renminbi market since 2007 (Figure 5). In October 2009 China's Ministry of Financeissued its first renminbi bond in Hong Kong. In addition, since a July 2010 agreement
between mainland China and Hong Kong to increase the use of the renminbi forsettling trade transactions, non-Chinese companies and financial institutions have also
been allowed to issued renminbi bonds there.
Called "Euroyuan bonds" by some, these bonds have tended to be affectionately
called dim sum bonds ever since the US fast food group McDonald's issued such abond in August 2010. Issuance of renminbi bonds in Hong Kong, including dim sum
bonds, grew from RMB10.0 billion in 2007 to RMB12.0 billion in 2008 and
RMB16.0 billion in 2009. However, after the Chinese authorities allowed therenminbi to be used for settling trade transactions in 2009, issuance increased to
RMB35.8 billion in 2010 and RMB86.8 billion as of 8 December 2011.

2. Issuance of dim sum bonds by Japanese companies
A number of Japanese companies have also begun to issue dim sum bonds. The
first was Orix, which was followed by Mitsubishi UFJ Lease & Finance, Tokyo
Century Lease, and Sumitomo Mitsui Finance & Leasing (Figure 6). A number ofJapanese financial institutions have also been involved in underwriting dim sum bonds,
whether issued by mainland Chinese or foreign, including Japanese, companies.
We attribute the fact that most of the Japanese companies issuing dim sum bonds
have been financial leasing companies to their need to raise renminbi funds in line

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Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

Figure 6: Noteworthy issuers and Japanese companies/financial institutions
involved in issue of dim sum bonds
1. Dim sum bonds: issuance by Japanese companies and underwriting by Japanese financial institutions
IssuerIssue date
Redemption date
Maximum
Actual issue
Duration
Couponissue amountamount(Years)(%)(RMB100mn) (RMB100mn)

Orix

15 March 2011

24 March 2014

Mitsubishi UFJ Lease
8 April 2011
8 April 2013
& Finance
Tokyo Century Lease
28 April 201129 April 2014
Intime Department
8 July 2011
8 July 2014
Store
Sumitomo Mitsui
12 September 2011 12 September 2013
Finance & Leasing

3

4

4

Bookrunners

ANZ, Mizuho Securities,
Standard Chartered Bank,
2.00
BNP Paribas, Boom
Securities

2

2

2

1.65 n.a

3

2

2

3

10

10

2

2

2

12 September 2011 16 September 2014
1 November 2011
1 November 2012

3
1

3
2

3
2

Lafarge Shui ON
Cement14 November 201114 November 2014

3

15

15

Orix

22 November 201118 November 2014

3

5

5

2.70 Mizuho Securities, UBS
Nomura Securities, Citi,
4.65
ICBC Asia
Goldman Sachs, SMBC
2.50 Nikko Securities (Hong
Kong)
3.00
2.10 Nomura Securities
Citi, HSBC, Mitsubishi UFJ
9.00 Securities (Hong Kong),
Standard Chartered Bank
Standard Chartered Bank,BNP Paribas, ANZ, Credit
4.00 Agricole, Daiwa Securities
Capital Markets, Mizuho
Securities

Korea EximBank

2. Noteworthy dim sum bond issues since Vice Premier Li Keqiang’s Hong Kong speech
IssuerIssue date
Redemption date
Maximum
Actual issue
Duration
Couponissue amountamount(Years)(%)(RMB100mn) (RMB100mn)

ICBC Asia

4 November 2011

4 November 2021

10

15

15

Baosteel Group

28 November 201128 November 201128 November 201128 November 201328 November 2014
28 November 2016

2
3
5

10
21
5

10
21
5

Source:Bookrunners

HSBC, ICBC International,
Bank of China (Hong Kong)
3.13 HSBC, Deutsche Bank
3.50
4.38

6.00

Nomura Institute of Capital Markets Research, from a variety of sources

with the turnover of their renminbi assets in mainland China. In each case, the bonds
have been issued for 2–3 years, and it will be interesting to see how easily they can be
refinanced when they are redeemed. Furthermore, if they can be refinanced without
too much difficulty, we may also see Japanese manufacturing companies, which
normally have a slightly longer payback period, issuing dim sum bonds.

3. Issuance of dim sum bonds since Vice Premier Li Keqiang's Hong Kong
speechIn a speech he gave in Hong Kong in August 2011, Vice Premier Li Keqiang
announced that mainland Chinese companies would also be allowed to issue renminbi
bonds in Hong Kong in order to increase the opportunities for raising capital there. He
also announced that, as one of the ways of repatriating renminbi from Hong Kong to
mainland China, the Chinese government would encourage direct investment in China
using renminbi from Hong Kong and would allow foreign banks to raise capital in

Renminbi-denominated Inward Direct Investment Gets Underway in China

10mainland China using renminbi for a trial period. We have seen the first results ofthese announcements.
First, the issuance of dim sum bonds by mainland Chinese companies. The firstexample was an RMB6.5 billion issue by Baosteel Group, which was approved by theState Council and then the State Development and Reform Commission in October
2011. The issue itself took place in November 2011, and the proceeds are reported tohave been used to increase the capital of one of the group's overseas subsidiaries3.
Second, ICBC Asia, the Hong Kong subsidiary of Industrial and Commercial Bankof China, issued a dim sum bond later the same month. The proceeds were used totake a stake in Chinese Mercantile Bank, a mainland Chinese bank. HSBC also raised
capital in Hong Kong in November 2011 and used the RMB2.8 billion proceeds toincrease the capital of its Chinese subsidiary4.
Third, a number of foreign companies took out renminbi loans in Hong Kong tofinance their operations in mainland China. United Asia Finance, an equity-method
affiliate of Itochu based in Hong Kong, was the first company to use a renminbi
syndicate loan originated offshore by a group of Japanese banks 5 . The loan, forroughly RMB400 million, was in a combination of renminbi and Hong Kong dollars.
Mabuchi Motor raised RMB165 million in Hong Kong, also by means of a Japanesesyndicate loan, and used the proceeds to increase the capital of its Jiangxi subsidiary6.
Between the implementation of the aforementioned MOFCOM notice and PBOC
administrative measures on 14 October 2011 and 14 December 2011, MOFCOM
received 78 applications for approval of inward direct investment using renminbi
raised offshore, including in Hong Kong. Of these, it approved 74, according to
Huang Feng, Vice Chairman of the Department of Foreign Investment
Administration 7 . These 74 direct investment projects were worth a total of
RMB16,530 million, and 70% of them in value terms was initiated in Hong Kong. Of
these, 61 were approved by local MOFCOM offices and 13 by MOFCOM in Beijing.
The reason some of the applications were checked by MOFCOM in Beijing is thatthey were either for investments of RMB300 million or more or involved an industry
subject to state regulation. Furthermore, these 74 projects were funded either by loans
or by the proceeds of dim sum bond issues.
It is perhaps worth noting in this context that, although not all the renminbi that isborrowed in Hong Kong is repatriated to the mainland, the amount outstanding rosefrom RMB2.0 billion at the beginning of 2011 to RMB11.0 billion at the end of June
2011 and RMB19.0 billion at the end of September 20118. If companies are allowed
to make initial public offerings in renminbi in Hong Kong, a matter currently underreview, and the amount of renminbi available increases, we expect the amount of
inward direct investment to increase further.
3
4
5
6
7
8

See Japanese edition of www.people.com.cn., 22 November 2011.
See Nihon Keizai Shimbun, 25 November 2011.
See Nihon Keizai Shimbun, 1 November 2011.
See Nihon Keizai Shimbun, 25 November 2011.
See 21st Century Business Herald, 15 December 2011.
See Xinhua News Agency Beijing, 25 November 2011

11 Nomura Journal of Capital Markets Spring 2012 Vol.3 No.4

IV. Opportunities for Japanese financial institutions
Of the amount of renminbi raised by dim sum bond issues in Hong Kong in 2011,about 30% was underwritten by Hong Kong-based banks: 20.4% by HSBC and 10.5%
by Standard Chartered Bank (Figure 7). In view of the administrative burden of
repatriating renminbi to invest in mainland China (e.g., the need to open a special
account) and the need to check everything with the authorities, one would imagine
that this process would be easier for mainland Chinese banks with domestic branch
networks and close links to the Chinese authorities. These underwriting figures are
therefore a credit to the Hong Kong-based banks concerned.
Looking to the future and the likely increase in Japanese direct investment in China,
we would expect Japanese financial institutions, with close ties to Japanese companies,
to identify Japanese entities with an interest in issuing dim sum bonds. We would also
expect Japanese commercial banks to seek to appeal to potential Japanese issuers of
dim sum bonds on the basis of their branch operations (account opening,loans/deposits, forex, settlement) in China, and investment banks to seek to appeal on
the basis of their access to investors in Hong Kong and other offshore markets.
We expect the issuance of renminbi bonds and the availability of renminbi loans inHong Kong to continue to go hand in hand with inward direct investment using
renminbi. For this to happen and for Hong Kong's dim sum bond market to expand,we think investors will have to expect the renminbi to appreciate gradually in order tooffset the lower interest rates available in Hong Kong compared to mainland China.
The outlook for and predictability of Chinese economic, monetary and foreignexchange policy are therefore likely to be very important in 2012.

Figure 7: Dim sum bond bookrunner ranking (2011, top 10 institutions)Ranking

Bookrunner

1
2
3
4
5
6
7
8
9
10

HSBC
Standard Chartered Bank
Bank of China
Deutsche Bank
Industrial and Commercial Bank of China
Agricultural Bank of China
Goldman Sachs
Citigroup
China International Capital Corporation (CICC)
DBS
Total for top 10 institutions
Overall total(converted to renminbi)

Underwriting amount
($mn)
2,792
1,438
1,285
1,117
820
577
570
529
461
442

Underwriting
Deals
share
2010 ranking
underwritten
（％）
20.4
32
3
10.5
20
4
9.4
16
1
8.1
13
8
6.0
12
5
4.2
6
4.2
8
6
3.9
7
3.4
5
7
3.2
9
-

10,031

73.1

69

-

13,715
RMB86.8bn

100.0
-

80
-

-

Note:

1. Original data from Dealogic as of 8 December 2011.
2. Conversion to renminbi at mid-rate as of 8 December 2011 ($1 = RMB6.3319).
Source: Nomura Institute of Capital Markets Research, from Asiamoney data

Renminbi-denominated Inward Direct Investment Gets Underway in China

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