The RMB and Chinese private equity

The issue of China's currency will, no doubt, feature prominently in discussions - Washington complaining that Beijing keeps the Reminbi too low, giving Chinese companies unfair advantage in trade. It will be interesting to watch what will be achieved at this meeting as the power of the RMB have been affecting the behavior of private equity investors in China.

Indeed, the rise of the RMB funds has pushed fundraising figures in the Asia Pacific back to near pre-GFC levels. According to my colleagues in the research department around $11.5 billion have been raised for China-focused funds with an overwhelming 73% of that figure being RMB denominated vehicles. By contrast, only half of the $6.5 billion raised in 2009 was in the Chinese currency.

This is all good for fundraisers looking to tap into the world's most populous country but also begs the question on whether or not the power of the RMB will extend beyond the borders of the Mainland? As one industry veteran told me, it is only a matter of time before Chinese investors (beyond the CICs, NSSFs) begin to be more prominent investors into private equity funds, and he means traditional US dollar funds. There are a few policies that will allow limited investment in USD vehicles believed to be underway.

One such example is the Wenzhou government in Southeastern China's Zhejiang province allowing its residents to invest directly overseas. This pioneering effort, the first of its kind, allows local residents to create non-financial companies, perform M&A or make equity purchases in overseas companies with an investment cap of $3 million per deal. Groups are allowed to deploy up to $10 million but each individual is limited to investing $200 million per year. Definitely, an opportunity for some funds to help them reach their target amounts in this still tough market.

Will such conversion policies mean that the massive RMB coffers being raised will one day be used overseas? Probably but most likely for reasons other than the lack of local opportunities as AVCJ Research have shown that private equity and venture capital investments in China has reached an all-time high of $19 billion last year and accounts for 19% of all inbound M&A activity, up substantially from 2009's corresponding figures of $13.7 billion and 12.6%.

Finally, I posed the question to a few industry people of whether the RMB will ever replace the USD as their currency of choice. Most answer that the Yuan probably won't replace the greenback in the short to medium term but will almost equally important to GPs with China business. The most important issue to remember is that trade is still being conducted in US dollars and until the RMB is freely convertible, it remains only an equal.

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• Topics
• Regulation
• Greater China