The Implementing Measures for the Pilot Program of
Foreign-Invested Equity Investment Enterprises (the
promulgated by the Shanghai government in early 2011 mark an
important change in China's policy towards foreign funded
private equity investment in China. The Shanghai Measures
conditionally permit foreign investors to convert foreign currency
for investment in and with RMB denominated private equity funds
("RMB Funds") in Shanghai. Furthermore,
RMB funds with limited participation of foreign investment may be
treated as a domestic fund, excluding them from restrictions
applying to foreign funds. Since the Shanghai Measures were
enacted, similar RMB Funds have been launched in Beijing, while
other areas of China are expected to follow soon.
The Shanghai Measures introduce two vehicles that enable foreign
investors to establish or invest in RMB Funds in Shanghai under
certain conditions. These vehicles may apply to a joint committee,
consisting of Shanghai governmental agencies, for "pilot
recognition". Pilot recognition allows foreign investors to
convert foreign currency into RMB for equity investment. There was
no prior legal basis for such currency exchange before the Shanghai
The new vehicles are:
The foreign invested equity investment management enterprise
("Management Enterprise"), a limited
liability company or partnership, acts as general partner of an RMB
Fund. A Management Enterprise must have, amongst others, a capital
exceeding USD2 million and at least 5 years of relevant experience
to apply for pilot recognition. The Shanghai Measures provide that
a Management Enterprise with pilot recognition is able to
contribute converted foreign capital to an RMB Fund. As long as
this contribution does not exceed 5% of the RMB Funds' total
capital and it concerns a fund with only domestic investors (i.e.
domestic limited partners), the fund will be treated as a domestic
fund, excluding it from certain foreign investment
The foreign invested equity investment enterprise
("Investment Enterprise"), a
partnership, is an RMB Fund. The committed capital of the
Investment Enterprise must be no less than USD 15 million, while
each limited partner's capital contribution must be no less
than USD1 million. To apply for pilot recognition the foreign
investors in an Investment Enterprise (i.e. the limited partners)
must be institutional investors recognised by the joint committee,
such as sovereign wealth funds and securities companies. Each
limited partner needs to have, amongst others, self-owned assets
worth not less than USD500 million or managed assets worth not less
than USD1 million in the financial year preceding the
The Shanghai Measures have opened up China's private equity
market to foreign investors. Media recently reported that the first
group of foreign investors, including the major buyout funds
Blackstone Group and Carlyle Group, has obtained qualification
recognition in Shanghai. Following Shanghai's lead, Beijing has
allowed Goldman Sachs and Morgan Stanley to launch similar RMB
Funds in Beijing, while Tianjin is also expected to start a similar
The rules governing private equity investment promulgated by
different local governments have further developed China's
private equity industry, but have also led to an incoherent legal
framework in China. The National Development and Reform Commission
("NDRC"), however, recently promulgated
the Circular on Further Improving Administration of Developing and
Filing of Equity Enterprises in Pilot Areas, followed by Guidelines
providing further clarification on the Circular on 21 March 2011.
NDRC's legislation for the first time codified general
operational, disclosure and filing requirements for RMB Funds in
different areas of China.
The new rules on RMB Funds offer foreign investors easier access
to domestic investments and domestic investors. Despite these
opportunities, regulatory restrictions remain. Further reform will
be necessary if foreign investors are to be operating on a level
playing field with domestic investors.
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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