PE circles China's pilot financial hub

The “top ten” global private equity firms have been in “deep talks” to enter China’s pilot cross-border currency hub in Qianhai, according to Jin Xia Wang, liaison director for the Qianhai hub.

Two of the ten foreign firms have already applied and been approved to enter, Wang said, declining to disclose the firm names. 

However, a source close to the matter said that The Carlyle Group and Kohlberg Kravis Roberts are the two foreign private equity firms that have been approved. Both firms declined comment.

Last year, China country manager Hony Capital said it will be among the first to participate in the zone, PE Manager reported earlier.

Qianhai, near Shenzhen, just across the border from Hong Kong, is China’s new financial hub that is expected to offer, among other attractions, liberalized regulations on cross-border currency flows. 

Private equity firms approved to operate in Qianhai will be allowed to raise RMB funds in Hong Kong, where the currency trades freely. Firms raising funds in Hong Kong would then be permitted to invest the capital anywhere in China as if they were domestic funds.

In addition, a pilot Qualified Foreign Limited Partner (QFLP) scheme aims to allow foreign currency raised outside of China to be brought into the hub and converted to RMB, which could then be invested domestically. Foreign exchange conversion and settlement issues would not apply in the hub and a fund would be treated as a domestic investor.

However, the industry is still awaiting confirmation from the central government, said Danny Kwan, tax partner of PricewaterhouseCoopers China, based in Shenzhen.

“Whether an investor coming in through Qianhai can be treated as a domestic investor with no restriction is a big issue with the central government,” he said. “At this point it’s very difficult to see if it’s actually going to work that way.”

Eligible companies are also expected to receive a 15 percent preferential profit tax rate, but tax benefits are also awaiting clarification. “Foreign private equity is waiting on a tax decision,” Kwan said. 

More than 650 enterprises have been approved to enter Qianhai, representing a registered capital of RMB 88 billion (€10.9 billion; $14.3 billion), according to PWC. Within the first five months of 2013, about 400 of the approved firms have already moved into the hub, according to a local official.