Foreign RMB funds to be classified as overseas entities

The central government's clarification of the rules came in a response to an inquiry submitted by the Shanghai authorities that specifically cited concerns about the status of a vehicle run by The Blackstone Group.The document has been cited by The Wall Street Journal and local media.

It is the first time a Chinese regulator has released information on the classification of foreign-backed renminbi funds since the concept was launched in 2009. The clarification threatens to undermine much of the rationale behind foreign managers setting up renminbi funds: that a local currency vehicle is able to invest more freely in China than a US dollar fund.

The introduction of the QFLP (Qualified Foreign Limited Partnership) scheme, which allows foreign capital to be channeled into renminbi vehicles, represented a significant regulatory concession. A fund raised by a foreign GP with QFLP status would be treated as a pure renminbi fund if all the LPs were domestic investors and the GP's own commitment didn't exceed 5% of the total corpus.

"The pilot regime allows renminbi funds managed by a foreign-invested GP remains its status as pure domestic funds," Sun Hong, a partner at Norton Rose who specializes in M&A, told AVCJ. "Being the first one, the pilot QFLP regime in Shanghai attracted huge interest from PE players."

Blackstone became the first foreign GP to launch a local currency fund and reportedly observed the 5% rule. It set a target of RMB5 billion ($795 million) and reached a first close in August 2009, having received commitments from Chinese government entities, state-owned enterprises, and large domestic corporations.

If such vehicles are now going to be classified as foreign, they can only invest according to the Catalogue of Industries for Guiding Foreign Investment, which was revised in 2011. More than 30 industries are closed to foreign participation, including media, entertainment, transportation, electricity and chemicals.

"If the new ruling represents the final official position of the NDRC, it will be another dramatic change. It seems that domestic treatment under the current pilot programs would have to end, although the ruling might not be implemented retrospectively,"Hong added.

In February, TPG Capital reached a first close of its two China funds, having received commitments of RMB4 billion. The private equity firm stated 90% of the capital was raised came from private investors rather than government-linked entities. In July 2010, The Carlyle Group announced a first close of RMB2.4 billion for the RMB5 billion Carlyle Beijing RMB Fund.

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• Topics
• Greater China
• Regulation
• Renminbi fund
• China
• regulation
• The Carlyle Group
• The Blackstone Group
• TPG Capital