Shanghai opens door for foreign private equity funds

The Chinese yuan is not fully convertible and currently China's stringent currency controls do not allow overseas private equity funds to convert foreign capital into yuan as part of a partnership for local investments.

Under the new scheme, investments by approved foreign private equity managers into a yuan-denominated fund must not exceed five per cent of the total amount of the fund, according to rules released by the Shanghai Financial Affairs Office this week.

The programme, known as the Qualified Foreign Limited Partnership plan, aims to "attract quality, long-term capital, boost domestic private investment and promote the development of yuan-denominated private equity funds", it said.

The trial will be launched around January 24, according to the new rules.

Under the trial programme, foreign private equity firms that want to participate must have at least $500 million in assets or manage at least $1 billion in assets.

Each fund must have at least two managers with at least five years of private equity investment experience.

Analysts said the programme, although lacking details such as portfolio investment restrictions, will make it easier for foreign private equity funds to explore investment opportunities in the world's second largest economy.

The new rules signalled "a considerable improvement on the relaxation of the foreign exchange conversion, which has long been a major obstacle for a foreign investor to raise a Renminbi fund," British law firm Allen & Overy said in a note.

Foreign private equity firms, including the United States' Blackstone Group and Carlyle Group, have already raised funds in yuan through partnerships with local governments or Chinese firms after the government relaxed rules in 2010.

China has pledged to relax its currency controls, which have been blamed for the country's mounting foreign exchange stockpile and growing inflationary pressures.