A boost for Private Equity? China allows foreign-invested partnerships

A significant hurdle for foreign PE funds in China is the lack of an appropriate structure for setting up an onshore fund (a so-called Renminbi fund) that can raise funds locally and invest without the need to go through arduous foreign investor approvals. New rules allowing foreign-invested partnership enterprises (FIPEs) look set to change that.

The rules are the Measures for the Administration of the Establishment of Partnership Enterprises inside China by Foreign Enterprises or Individuals (the Measures) that were issued on 2 December 2009 and will come into effect on 1 March 2010.

Although since 2003 foreign PE funds have been permitted to establish Renminbi funds in the form of "venture capital companies", that structure did not offer the kind of flexibility that private equity funds generally enjoy abroad. Venture capital companies were highly restricted in the manner in which their funds are raised and the permitted targets of investment.

Further, each investment of a foreign-invested venture capital company requires government approval. It appears that FIPEs may avoid these restrictions, although further implementing regulations are needed; the Measures themselves are incomplete and only contain 16 brief articles.

Recent openings in major cities

Amidst efforts to promote the role of PE in China's development, local governments in Beijing, Shanghai and Tianjin issued rules on foreign-invested Renminbi funds earlier this year. These new rules offered more flexibility in the form in which a PE fund can be established and greatly simplified establishment procedures, but were limited to those three locations.

Partnership funds

PE funds outside China are often organised in the form of limited partnerships. The PRC Partnership Enterprise Law of 2007 did not permit foreign investment in PRC partnership enterprises, so this structure remained closed to foreign PE funds until now. A draft law on FIPEs was circulated some time ago but never enacted, which would have put FIPEs on the same legislative level as Sino-foreign joint ventures and wholly foreign owned enterprises, but China appears to have temporarily abandoned this in place of the Measures as a lower level regulation which permits foreign investment in partnership enterprises.

Form of establishment and speedy approvals

FIPEs can be set up either by two or more foreign enterprises or individuals without a domestic partner or by a foreign enterprise or individual together with a domestic individual, enterprise or other organisation.

To establish a FIPE, a representative designated or jointly authorised by all partners must apply to the local enterprise registration authority (the administration for industry and commerce or AIC) for approval and registration. After the AIC registration, the AIC must report the establishment to the commerce authority of the same level. This is solely a notification and no further approval is required.

This distinguishes the establishment of FIPEs from other forms of foreign investment in China, which typically require approval by the PRC commerce authorities. As usual, if a FIPE's business scope includes business activities that require approval by specific authorities (eg the Ministry of Health for pharmaceuticals, the MIIT for telecoms, and so on) then the FIPE must first obtain the relevant approval before it can register with the AIC.

In addition to the establishment of a new FIPE, a FIPE can be created by a foreign enterprise or individual joining an existing domestic partnership enterprise which then reregisters with the local AIC as a FIPE.


The foreign partner can make its capital injection in the FIPE either in freely exchangeable foreign currency or with "legally obtained Renminbi". This is rather more flexible than previous drafts of these regulations, which only allowed for Renminbi to be used in fairly limited situations.

The rules are silent on the minimum capital, and so we can assume (for now) that partners may agree on capital contribution in the partnership agreement. Offshore funds frequently provide for capital call mechanisms, and possibly these can be reflected in FIPEs.

Encouragement of hi-tech companies

The Measures encourage foreign companies and individuals with advanced technology and management skills to set up partnership companies in China to promote the development of a modern service industry and other industries. However, this does not appear to prevent other types of foreign investors from applying.

More details required

In an explanation of the Measures, the State Council clarifies that the Measures are supplementary legislation to the Partnership Law and other relevant regulations currently applicable to domestic partnership enterprises. FIPEs are therefore subject to the provisions of the Partnership Law and other relevant regulations in terms of its liabilities, financial accounting, taxes, foreign exchange, customs and entry and exit of personnel of FIPEs. More details will have to be provided in subsequent legislation on various matters such as registration, capitalisation, foreign exchange remittances and permitted scope of business.

Useful to PE funds?

The Measures provide that if a FIPE invests in a project for which government verification is required, then government verification must be obtained. This seems to indicate that the investment activities of FIPEs in China will not be subject to the regime for foreign investment approval but solely to the regime applicable to domestic investments in China. We will have to await the implementing regulations to see whether this interpretation is correct.

The State Council explanation also makes clear that FIPEs will be subject to the same restrictions on the business activities that apply to all foreign investors. It is therefore not clear whether FIPEs will be permitted to operate as PE fund vehicles as this business activity is still not fully open to foreign investment. The State Council's explanation on the Measures emphasises that FIPEs that have the words "investment activities" in their business scope should be permitted, as long as this is permitted by other state regulations.

If you would like a translation of the Measures, please contact us.

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