Strong appetite, little clarity

RMB funds’ popularity with foreign firms remains buoyant, despite continued uncertainty around their set up, according to a recently released study by the China Venture Capital Association.

Some 91 percent of the foreign private equity and venture capital firms interviewed in the Chinese industry-wide survey said they believed the rise of RMB funds was an inevitable trend and one they anticipated joining in the long term.

Shanghai, Tianjin and most recently Beijing have all introduced policies which encourage the formation of private equity funds and fund management companies in local jurisdictions.

Foreign investors frustrated with the lengthy government approval processes they must pass through to invest in China see RMB funds as a potential shortcut, says Joel Rothstein, a Beijing-based partner at law firm Paul, Hastings, Janofsky & Walker, which collaborated on the study. They also see them as a way to try to tap into the increasing pool of domestic capital available to invest in private equity, he adds.

Rothstein points out that there is still a lot of ambiguity in the laws and regulations regarding funds that blend foreign and domestic LP commitments and firms eager to get on the RMB bandwagon must continue waiting for a more comprehensive regulatory framework.

There was hope clarification would be offered for the private equity industry when government authorities finally issued a set of rules on foreign invested partnerships in late November 2009. But many foreign investors and fund managers interested in forming or managing foreign invested RMB funds were left disappointed, Rothstein notes.

The regulations did give the green light to the inclusion of foreign investors under China’s limited partnership laws, allowing foreign investors to form a vehicle with the same kind of attributes as limited partnerships in other jurisdictions, such as the limited liability of partners and a pass-through tax vehicle. 

However, they “effectively included a requirement that when a partnership is being utilised for fund purposes, it must comply with certain additional regulations, which do not yet exist, thereby leaving many unanswered questions,” Rothstein explained.

According to market insiders, China’s National Development and Reform Commission is currently developing comprehensive regulations to govern the fund industry, although when these might be completed nobody knows. More guidance will be required from the State Administration of Foreign Exchange (SAFE) and other governmental authorities that “describe, among other things, how you repatriate, and move money in and out of a foreign invested partnership fund” – something which at the moment is subject to restriction under SAFE’s 2008 Circular 142 law.