PE circles China's pilot financial hub

Top global private equity firms have been in extensive talks to enter China’s experimental financial hub in Qianhai, according to local officials.

The “top ten” global private equity firms have been in “deep talks” to enter China’s pilot cross-border currency hub in Qianhai, Jin Xia Wang, liaison director for the Qianhai hub, told Private Equity International.

Two of the top global firms have already applied and been approved to enter, Wang said, but he declined to disclose the firm names. 

However, a source close to the matter told PEI that The Carlyle Group and Kohlberg Kravis Roberts are the two global private equity firms that have been approved. The firms were contacted but declined to comment.

Whether an investor coming in through Qianhai can be treated as a domestic investor with no restriction is a big issue with the central government. At this point it’s very difficult to see if it’s actually going to work that way

Danny Kwan, tax partner, PwC China 

Outside the global shops, about five foreign and nearly 100 domestic private equity firms have been approved, according to PriceWaterhouseCoopers China.

Last year, China country manager Hony Capital said it will be among the first to participate in the zone, PEI reported earlier.

Qianhai, near Shenzhen, just across the border from Hong Kong, is China’s new financial hub that is expected to offer, among other attractions, liberalised regulations on cross-border currency flows. 

Private equity firms approved to operate in Qianhai will be allowed to raise RMB funds in Hong Kong, where the currency trades freely. Firms raising funds in Hong Kong would then be permitted to invest the capital anywhere in China as if they were domestic funds.

In addition, a pilot Qualified Foreign Limited Partner (QFLP) scheme aims to allow foreign currency raised outside of China to be brought into the hub and converted to RMB, which could then be invested domestically. Foreign exchange conversion and settlement issues would not apply in the hub and a fund would be treated as a domestic investor.

However, the industry is still awaiting confirmation from the central government, said Danny Kwan, tax partner at PWC China, based in Shenzhen.

“Whether an investor coming in through Qianhai can be treated as a domestic investor with no restriction is a big issue with the central government,” he said. “At this point it’s very difficult to see if it’s actually going to work that way.”

Eligible companies are also expected to receive a 15 percent preferential profit tax rate, but tax benefits are also awaiting clarification. “Foreign private equity is waiting on a tax decision,” Kwan said. 

More than 650 enterprises have been approved to enter Qianhai, representing a registered capital of RMB 88 billion (€10.9 billion; $14.3 billion), according to PWC. Within the first five months of 2013, about 400 of the approved firms have already moved into the hub, according to a local official.