Shanghai (pleasant) surprise

Foreign private equity firms will now be able to establish wholly-owned subsidiaries or joint ventures in Shanghai, as part of new rules that were enacted last month. While many foreign firms already have offices in the city, but those are generally geared towards bolstering their portfolio companies.

 Shanghai, which has stated its intention to become a significant international financial centre, will now offer a number of incentives to encourage the growth of investment-focused offices there.

Currently, foreign firms face lengthy approval processes on investments in China, and are restricted from investing in certain industries. But as part of the new trial policy, foreign investors may set up investment management companies in the Pudong New District of Shanghai if they have at least $2 million of registered capital, according to a memo by Dechert partners Michael Hickman and Basil Hwang.

In addition, senior management of the company must include at least two officers with two or more years of relevant industry experience, and at least two years in senior management positions.
In order to spur the creation of such companies, the government will provide assistance with office costs and rental, as well as provide tax refunds of up to 40 percent for senior personnel and 20 percent for key management. Such benefits are not available to ordinary consulting companies or representative offices in Shanghai.

Hickman and Hwang say that firms looking to establish a presence in the city should act quickly to take advantage of the new rules, as they will only be in force until 30 June 2010. They believe the short shelf life of the measures indicates more regulatory advances are in the pipeline, part of Shanghai’s efforts to improve the regulatory regime for private equity and growth capital firms.

As the city seeks to become an increasingly vital financial centre, Pudong has been the most popular destination for industry players, with 73 banks, 202 brokerages and 145 insurers establishing operations. It was reported in June that The Blackstone Group is in talks with the Shanghai city government to become one of the first foreign firms to take advantage of the new measures, and has received “strong support” from the Shanghai Financial Service Office.

However, if the city’s liberalisation policies continue, others will likely be following in Blackstone’s footsteps.