The Oriental Morning Post reported that a Trial Plan for the
Participation of Foreign Investment into RMB Equity Investment
Funds (the "Trial Plan") was
approved by the Shanghai government on March 15, 2010. This
development will be fully publicized in April and first implemented
in the Pudong New Area. The Trial Plan will open a gateway for the
conversion of foreign exchange into RMB, which has been a major
factor hindering foreign general partners (GP) and
limited partners (LP) from becoming involved in
the RMB PE fund industry.
According to Circular Hui Zong Fa  142
("Circular 142"), unless otherwise
provided for under law, the capital of a foreign invested
enterprise ("FIE") shall not be used for
equity investment. If an FIE intends to act as a GP of a RMB PE
fund, it will find it difficult to satisfy the GP's RMB
commitment (often 1% of the total commitment of the fund) because
the FIE cannot convert its capital into RMB. This further
effectively blocks the means by which an FIE is able to act as an
LP because it is much more difficult for it to satisfy the LP's
RMB commitment, which is typically substantially higher than a
The Trial Plan is intended to establish a Qualified Foreign
Limited Partner ("QFLP") mechanism by
adopting the approach similar to the QFII (Qualified Foreign
Institutional Investor) system, and allows foreign funded GPs and
LPs to convert foreign exchange capital into RMB. The aggregate
quota for foreign exchange convertible into RMB shall not exceed
50% of the size of the fund, and the quota for a GP shall not
exceed 5% of the fund size.
It is unclear if foreign funded GPs and LPs refers to foreign
investors only or both foreign investors and FIEs, which are
Chinese entities partly or wholly owned by foreign investors. Also,
as is known by veterans of the Chinese PE industry, a domestic
partnership's partners shall all be Chinese individuals or
Chinese entities, which may include FIEs. This allows indirect
foreign investment (with difficulties arising from foreign exchange
conversion). On the other hand, a foreign invested partnership may
directly accommodate a foreign GP or LP. Therefore, either a
domestic partnership and a foreign invested partnership both allow
the participation of foreign investment. However, it is unclear if
the Trial Plan will apply to both domestic partnerships and foreign
Though not crystal clear, a domestic partnership with indirect
foreign investment is likely to be treated equally as other pure
domestic funds in terms of portfolio investment, but a foreign
invested partnership will be treated as a foreign investor and
subject to industrial restrictions and cumbersome approvals. If the
Trial Plan does apply to domestic partnerships, that will be a real
breakthrough and Pudong will be better positioned to attract RMB PE
funds than its competitors in China. Further details will be
publicized in April.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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