Foreign LPs get go ahead to invest in RMB funds

Under a pilot programme launched by the Shanghai government, qualified foreign limited partners will be able to commit up to 50% of one onshore fund’s capital. Beijing and Tianjin are also said to be awaiting approval for the same programme.

Shanghai has received in-principle approval from China’s financial authorities to launch a pilot program allowing foreign limited partners to invest in the country’s domestic private equity and venture capital markets, according to a statement from global law firm Debevoise & Plimpton LLP.

Chinese media reports suggested that the Beijing and Tianjin governments have also applied to participate in the programme, but have yet to receive a green light.

Under the programme, qualified foreign LPs (QFLPs) will be able to convert foreign currency for investment into an onshore RMB-denominated fund established in Shanghai, as long as the aggregate quota for foreign-originated capital does not exceed 50 percent of the total size of the fund.

Hubert Tse, a partner at Chinese law firm Boss & Young in Shanghai, told PEI Asia in August, in the run-up to the initiative’s launch, that there would also be a rule limiting the total amount of foreign capital converted into RMB to $100 million for each fund.

According to local media reports, the programme could be applied to various districts in Shanghai, not just the Pudong New Area, which is where previous private equity initiatives – like the one launched in June 2009 allowing offshore GPs to establish an onshore entity – have been focused.

Detailed rules on the new programme are expected to be promulgated by early November, according to Debevoise.

In August, Tse predicted the QFLP rules would help galvanise Shanghai’s private equity industry, giving it a competitive advantage over other Chinese private equity centres such as Beijing and Tianjin. 

“It is expected that with the release of the QFLP rules Shanghai will benefit from a greater number of foreign private equity funds and talent coming to Shanghai,” he said. “In the process [this will] help to further internationalise and grow the local Chinese private equity industry as foreign and Chinese GPs go head-to-head.”

Currently, foreign currency conversion for the purposes of investment is restricted in China under a 2008 law from the State Administration of Foreign Exchanges (SAFE) called Circular 142, which prohibits foreign-invested RMB funds from undertaking onshore private equity investment in China.

The QFLP programme will be a significant step in leveling the playing field between foreign and domestic LPs in China, given that RMB funds enjoy significant advantages over their USD counterparts when it comes to investment in China. Because of this, it should also help to ease the issue of conflict of interest that has arisen between same-manager RMB and USD funds.