Shanghai revives QFLP ambitions

Shanghai is once again attempting to lead the way in bringing offshore RMB back into China.

Shanghai was recently approved as the first city for the launch of the RMB Qualified Foreign Limited Partner Pilot Programme (RQFLP). The detailed rules are still being drafted by Shanghai government authorities, but the programme is intended to allow RMB funds raised offshore to flow back into Shanghai for investment, according to a Han Kun Law Offices report.

The programme is at present limited to Shanghai, but the Bank of Shanghai and Haitong Securities’ Hong Kong subsidiary – Haitong International – have already signed an agreement to raise an RMB fund in Hong Kong, with the express purpose of making private equity investments in unlisted companies in Shanghai, according to a Z-Ben Advisors analysis. The fund is targeting the RMB equivalent of about $100 million.

Shanghai: QFLP do-over

This programme is part of China’s push to give the RMB global status, according to Weil, Gotshal & Manges partner John Fadely, but the new incarnation also gives China access to foreign RMB capital. The greatest difference with the Shanghai programme, Fadely told PE Asia, is that it is RMB-based instead of foreign currency-based.

“Rather than allowing foreign venture firms to set up funds in Shanghai, [this program] allows offshore RMB to flow back to China,” added James Wang, partner at Han Kun Law Offices.

However, both lawyers do not believe the new RQFLP will make a big splash in the private equity industry in the near future. For one thing, given that participants are limited to offshore RMB, applicants will mostly be limited to Hong Kong brokerage firms in practice, Wang said.

Also, the disappointing history of the QFLP program will make private equity firms more cautious, Fadely said. Regulators ruled in May that foreign-sponsored RMB-denominated funds raised through the QFLP programme will not receive the same treatment as domestic funds, referring specifically to a fund raised by The Blackstone Group. The problem there, Fadely said, was misunderstanding.

Many foreign GPs had hoped that the QFLP would bring them the same privileges enjoyed by domestic GPs. Yet this was never stated in the QFLP regulations.

“There was never reason to believe that the goal of the programme, on its face, was to let foreigners overcome investment restrictions that apply to offshore funds,” Fadely said.

As for the RQFLP, Wang believes that most private equity firms will not be eligible for the programme at this point (since most do not have RMB offshore), so the initial impact will be quite small-scale.

“There are a lot of foreign private equity firms thinking about how to leverage this, but they’re not sure how to yet,” Wang said.