Shanghai publishes guidelines to QFLP programme

The measures leave many of the questions around foreign LP investment into RMB funds unanswered, but contain good news for foreign GPs managing RMB funds.

Following months of speculation on its contents, Shanghai this week released a detailed guide to its pilot programme to allow foreign investors to commit to onshore RMB-denominated private equity funds.

However, the Implementation Measures on Pilot Program of Foreign-invested Equity Investment Enterprises in Shanghai (Pilot Measures), which will come into effective on 1 February, still leave ample room for interpretation.

Amongst the questions that have yet to be addressed in the document is that which has been foremost in LPs’ minds since the pilot scheme was first announced in October – i.e. whether comingled funds would be treated entirely as domestic capital, or whether they would continue to be treated as foreign capital and subject to the investment restrictions that status implies.

Likewise, no details on the total quota that would be granted by the Shanghai authorities for conversion from USD into RMB in this initial pilot scheme were given, and neither was a maximum ratio of USD to RMB in a single fund stipulated.

However, a news report from China Securities Journal posted on the website of Shanghai Municipal Financial Services Office has indirectly confirmed some earlier speculation around the first of these points.

According to the report, the conversion quota for Shanghai may be set at $3 billion and it might be separated into three stages of distribution. The RMB funds launched last year by the Carlyle Group, The Blackstone Group and Hong Kong-based First Eastern Investment Group are likely to be the beneficiaries of the first stage, which has a $300 million quota.

Despite their lack of clarity for LPs, the official Pilot Measures contained more good news for foreign GPs like Blackstone and Carlyle. They state that these funds, into which the foreign GPs are allowed to invest up to 5 percent of their own money, will in fact be treated as fully equivalent to RMB funds managed by domestic GPs – i.e. able to invest in industries restricted from foreign investment as well as invest without approvals, according to a statement issued by law firm O’Melveny & Myers.

Previously, RMB-denominated funds set up by foreign GPs such as Carlyle and Blackstone were still considered foreign funds. They faced restrictions on investment in certain industries including petrochemical and telecommunications, which are subject to approval by Chinese Ministry of Commerce and State Administration of Foreign Exchange (SAFE). They also faced a prolonged investment approval process encompassing different regional and central government entities.

The Pilot Measures also stated that an authority would be formed in Shanghai to deal exclusively with the operational issues of RMB funds – the first of its kind in any Chinese jurisdiction.

The authority, Joint Conference for Pilot Program of Equity-Investment Foreign Invested Enterprises, will be staffed by senior delegates of relevant government bodies including Shanghai Municipal Financial Services Office, the Municipal Commission of Commerce and the Shanghai Branch of SAFE.

Last week, Chinese local media reports stated that Beijing had also been granted approval from the Chinese central government to launch a similar currency conversion programme to allow foreign investors to invest in onshore private equity funds.