China eases rules for foreign RMB funds

Chinese authorities are understood to have approved new legislation that will make it much more attractive for foreign GPs to launch RMB funds in Shanghai’s Pudong district.

Shanghai is continuing to reduce barriers for locally based private equity funds, according to a client note issued by law firm Debevoise & Plimpton.
“Chinese regulators in the last few days have reached agreement to permit general partners organised in Shanghai Pudong to convert foreign currency into Chinese currency for investment in their own RMB-denominated funds,” the law firm said.

Up until now, the ability of foreign GPs to make financial commitments to an RMB fund has been prevented by Circular 142, a rule issued by the Chinese government’s State Administration of Foreign Exchange (SAFE). 

“The Shanghai Pudong District government has reached an agreement with SAFE that general partners organised in Pudong will receive an automatic waiver to convert foreign currency into RMB for investment in their own RMB funds.”

The waiver applies to up to 1 percent of total capital commitments to a fund, Debevoise said. The GP commitment to a fund – viewed as a vital aspect of GP/LP alignment – is generally in the range of 1 percent to 2 percent of the total capital raised.

The development is a significant boost for Shanghai Pudong as it seeks to become the leading centre in China for fund formation. Shanghai has attracted foreign GP groups such as The Blackstone Group, which officially launched its first RMB fund in Shanghai last week, as well as the Carlyle Group and First Eastern Investment Group.

Up until now, such firms have been forced to operate in an opaque environment in which the central authorities have tended to stay quiet rather than clarify areas of legislative contention. The latest move will be taken as a welcome sign that the Chinese government may be prepared to proactively assist Shanghai’s efforts to attract foreign capital.