China’s ruling hits foreign-sponsored RMB funds

In a setback for foreign GPs, China’s NDRC has ruled that foreign-sponsored RMB-denominated funds will not receive the same treatment as domestic funds.

Foreign GPs hoping for more flexibility to invest in China via onshore funds face a setback following a recent ruling from the National Development and Reform Commission.

The NDRC issued a statement that mentions a fund run by The Blackstone Group, which had hoped to get local investor treatment for an RMB 5 billion (€610 million; $792 million) fund it is raising.

The NDRC said that investments made by Blackstone’s renminbi fund would have to comply with the Catalogue for the Guidance of Foreign Investment Industries issued by the nation’s regulators.  

Therefore the fund, previously considered to be a domestic partnership due to its pure Chinese LP base, would be subject to the same sector restrictions as a foreign fund when they invest.

The ruling comes as a disappointment for foreign GPs hoping to localise their funds to receive more local treatment, and sparks concerns about the nature of foreign-sponsored RMB funds, a China-based lawyer following the situation told PE Asia

Having more investment restrictions would reduce the attractiveness of these funds for both LPs and GPs, the lawyer said.  

In addition, the decision raises questions about whether it is justified for the NDRC to make such a decision, as foreign private equity regulations should come under the Ministry of Commerce (Mofcom), which oversees foreign investment, he said.  

There is still room for Mofcom to lift the restriction, and differentiate the approval process to separate foreign-sponsored RMB funds from foreign funds.

“The key is about approval. The catalogue only listed out the sectors in the three categories [encouraged, restricted and prohibited industries]. It did not specify what approval processes are needed for investments falling into them,” he said.

Last year, Shanghai and other cities in China launched a QFII pilot programme.  Under the programme, local currency funds sponsored by a foreign GP but with a pure Chinese LP base would receive the same treatment as a domestic partnership. 

Thus the domestic partnership concept contains a grey zone where foreign GPs may invest like local investors through the structure, according to a second China-based lawyer following the situation. 

Blackstone, The Carlyle Group and other major foreign GPs were encouraged to set up onshore funds under the structure, hoping to obtain benefits such as widened investment options and an easier approval process.