China: Shanghai QFLP private equity fund rules released at last - 17 January 2011

Last Updated: 19 January 2011
Article by Nicolas Groffman and David Xu

One of the main restrictions on private equity in China is being removed in Shanghai. Foreign private equity investors will be able to form limited partnership RMB funds, and qualified foreign limited partners ("QFLP") will be able to invest with RMB converted from foreign currency.

The Implementing Measures on Pilot Program of Foreign-invested Equity Investment Enterprises (the "2011 Measures"), formulated by three branches of the Shanghai government and effective from 23 January 2011, are summarised and discussed below.

Previously, foreign investment has been forced into partnering with a domestic joint-venture partner because SAFE will not approve conversion of foreign currency into RMB for investment purposes (except for investment companies or FIVCEs).

The 2011 Measures deal with two types of entity:

  • first, foreign invested equity investment fund management enterprises ("Fund Management Entity"); and
  • second, foreign invested equity investment enterprises ("Equity Investment Fund").

The 2011 Measures provides that some of these entities (appearing to be those special types of institutional investors, e.g. banks, insurers, pension funds, etc) can apply for "pilot" status, and can then take advantage of the new measures, as discussed in section 4 below.

Fund management enterprises existed already in Shanghai, under special regulations issued in Pudong in June 2009. The 2011 Measures copy the bulk of the 2009 set of rules, although they adjust some of the pre-requisites. More importantly, they allow Fund Management Enterprises to be set up as partnerships.

Presumably, the 2011 Measures will supersede the 2009 Pudong rules.

  • Funds may use their own money, including foreign currency, for portfolio investment in the PRC.
  • The 2011 Measures, however, do not provide any details relating to the actual formation and registration of a partnership sponsored and established by a Fund Management Entity.
  • The 2011 Measures require that each Fund must engage a "qualified" custodian bank in China to manage its fund.  It is, however, unclear what kind of banks may qualify as custodian banks for this purpose, especially whether foreign invested banks are qualified, and what rules may be adopted or applied for managing the Fund's money.
  • A Fund Management Entity that has obtained the pilot qualification is permitted to convert its foreign currency into RMB for investment in an RMB fund; provided that the amount so converted does not exceed 5% of the aggregate capital commitments of the RMB fund. Such investment would not change the nature of the fund.

1. Fund Management Entity

The 2011 Measures provide that a Fund Management Entity can be either a partnership or a company, and may do the following:

(a) establish Funds;

(b) manage the investments of Funds and provide services; and

(c) provide equity investment consultancy, and other approved business.

In the case of a partnership, it will be a QFLP participated fund management entity. The last two were allowed under the 2009 Pudong rules, but the key development under the 2011 Measures is that they will be allowed to establish Funds.

Conditions for formation

Although the 2011 Measures do not state it clearly, it seems a foreign investor is still required to form a Fund Management Enterprise in Shanghai to raise funds.

To form a Fund Management Entity, the conditions are:

(a) at least one of the investors, or an affiliate controlled by or controlling that investor, must have equity investment or management of equity investment as its business scope;

(b) two of the senior management should have the requisite qualifications, including but not limited to: five years experience in equity investment or equity investment management, including two years in senior management, as well as China related banking and finance work experience, and they should not have been involved in economic disputes over the preceding five years; and

(c) subscribed capital must be at least USD2 million, in cash, with 20% to be paid in within 3 months after issuance of business license and the rest to be paid in within two years.

If the Fund Management Entity takes the form of a company, Shanghai local MOFCOM approval is required. According to the 2011 Measures, this will take around 30 working days after required documentation is submitted. Following that, Shanghai AIC registration, a routine procedure, is required and is supposed to take around one to two weeks.

If the Equity Investment Fund Management Entity is formed as a partnership, only Shanghai AIC registration is required. This will take at least around 15 working days, according to the 2011 Measures.

2. Fund

Capacity and conditions for formation

A Fund may use its own capital to conduct equity investment, to provide management consultancy, and other approved business.

It appears that the Fund is assumed to be a partnership, and the 2011 Measures only discuss procedures to set up a Fund as a partnership. It is unclear and not specified under the 2011 Measures whether there will be special conditions, or restrictions, for a QFLP to directly participate in the formation of a QFLP Equity Investment Fund.

The Fund must have the following:

(a) the words "equity investment fund" in its registered name;

(b) subscribed capital of at least USD15 million, totally contributed in cash;

(c) partners who invest in its own names; and

(d) each limited partner to subscribe to at least USD1 million.

Capital used by the investor, eg. a Fund Management Entity, to contribute into the Fund could be either convertible foreign currency, RMB profits obtained within China or RMB sums gained through equity transfer or liquidation.

The formation of a Fund requires a registration procedure with Shanghai municipal AIC. It will take at least around 25 working days, as per the 2011 Measures.

Funds' investment restrictions

When making a portfolio investment, a Fund set up under the 2011 Measures is required to follow the foreign investment laws and regulations in China. The 2011 Measures specifically provide that a Fund is prohibited from:

  • investing in foreign-restricted sectors in China;
  • investing on a stock or corporate bond exchange in the secondary market (except when its invested company is listed);
  • investing in futures or other financial derivatives;
  • making investments directly or indirectly in non-self used real estate;
  • not using its own capital to make investments; or
  • providing loans or guaranties.

In addition, it is unclear whether there will be any particular conditions or procedures for a Fund established in Shanghai to invest outside Shanghai, and what the other local government authorities' attitudes will be.

3. Special regulatory bodies

For the formation of either a Fund Management Entity or a Fund, approval is needed from the Shanghai Municipal Financial Affairs Office (the "Finance Office"), a department within the Shanghai local government, which will receive information/documents from Shanghai local MOFCOM or Shanghai AIC, as applicable.

On top of these authorities, the 2011 Measures set out a Foreign Invested Equity Investment Enterprise Pilot Programs Joint Commission (the "Joint Commission") (participants include the Finance Office, Shanghai local MOFCOM, Shanghai municipal AIC, Shanghai Municipal Development and Reform Commission, Tax Bureau, and other related regulatory bodies). The Joint Commission is required to work on the relevant pilot programs, and any problems arising from the programs should be addressed to it.

4. Pilot Fund Management Entities and Pilot Funds

The 2011 Measures also regulate the establishment of "pilot QFLP Funds" or "pilot" funds or Fund Management Entities to be invested by foreign institutional investors, particularly, sovereignty funds, pension funds, charity funds, fund of funds, insurance companies, banks and securities firms.

Pilot Fund Management Entities and pilot Funds have the following features:

(a) They will be selected from established QFLP Fund Management Entities,

(b) Most of the pilot Fund Management Entities will be invested by particular types of institutional private equity investors abroad, such as banks, insurers and pension funds, etc. The 2011 Measures require higher level approval (approval from the Joint Commission, on top of the AIC or the Finance Office and/or the BOC), and so the application may be more complicated.

Pilot Fund Management Entities may use their own foreign exchange, besides the registered capital contributed into established Funds, to invest into any of the Funds that they establish ("Additional Discretionary Investments"). These Additional Discretionary Investments are subject to a 5% carve-out treatment, i.e. such investments are capped at 5% of the invested Funds' sizes for each case. The 2011 Measures do not affect the "original nature" of such invested funds.  No further interpretation of this is available, but many commentators have suggested that this may allow domestic funds to avoid being categorised as foreign-invested. 

In addition, as mentioned above, if the Funds' investments are made Shanghai, it is questionable whether the relevant approval authorities in that city will recognise the exceptional treatment granted by the Shanghai authorities.

In application for a pilot Fund Management Entity and/or pilot Fund, the investor must have, among other qualifications:

(a) held, in the preceding fiscal year, assets of no less than USD500 million or managed assets of no less than USD1 billion; and

(b) no less than five years relevant investment experience, or its affiliate must have such experience.


The 2011 Measures represent an important step forward and an opportunity for private equity. It is now the turn not of law firms and regulators, but of fund managers, private equity practitioners and investment banks to work out how the new rules work and to observe and comment on their implementation.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
De Brauw Blackstone Westbroek N.V.
CMS Cameron McKenna Nabarro Olswang LLP
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
De Brauw Blackstone Westbroek N.V.
CMS Cameron McKenna Nabarro Olswang LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions