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Report: Blackstone to set up Chinese entity

The US buyout major reportedly plans to take advantage of a pilot government policy allowing foreign firms to set up wholly-owned Chinese entities in the Shanghai Pudong New Area.

The Blackstone Group is reportedly in talks with the Shanghai city government to establish a wholly-owned Chinese subsidiary, sources have told Reuters.

Blackstone and the Shanghai Municipal Government declined to comment.

The firm would be the first to take advantage of a pilot policy introduced by the Chinese government earlier this month allowing foreign private equity and venture capital firms operating in the Shanghai Pudong New Area to set up wholly-owned Chinese entities. It has received “strong support” from the Shanghai Financial Service Office, a department of the Shanghai Municipal Government, according to the Reuters report.

Valid until the end of June 2010, the government's trial policy will allow foreign private equity firms to set up an onshore entity known as an “equity investment management enterprise”. Currently, foreign firms face long approval processes on investments and are restricted from investing in certain industries. They are also unable to raise RMB-denominated funds without partnership from a local firm and their onshore presence is limited to rep offices or consulting companies, with activities restricted to deal sourcing and due diligence.

The extent to which the pilot policy on equity investment management enterprises will soften the rules for foreign firms is still unclear and the government is expected to release more details over the coming month. Initial reports would suggest that the benefits are, as yet, limited.

“The regulations provide that the main business of the equity investment management enterprise shall be the management of equity investment for investors who have engaged them to do so and do not stipulate they can invest in Chinese targets – no other business activities are mentioned by the new regulations,” Hubert Tse, a managing director and head at Shanghai-based Yuan Tai PRC Attorneys told PEO.

However, he continued, government officials have indicated that “further down the track” it may be possible for the equity investment management enterprise to qualify as a domestic GP and form an onshore RMB fund with LPs to invest in Chinese targets.

According to the Reuters report, Blackstone is itself in discussions with the Shanghai city government about its intention to raise such a fund, although no further details were forthcoming.