UPDATE 2-Blackstone nails down some commitments to China fund

* Fund still in the market, has upper limit by law

* Three commitments nailed down for Blackstone's yuan fund

* China's national pension fund expected to invest -source (Changes dateline, updates throughout)

By George Chen and Megan Davies

HONG KONG/NEW YORK, Feb 26 (Reuters) - U.S. buyout giant Blackstone (BX.N) has nailed down three commitments so far to its landmark yuan-denominated fund for China, with the country's national pension fund expected to be a major investor.

Blackstone Group LP announced plans in August to launch a 5-billion-yuan ($732 million) fund to invest primarily in the city of Shanghai, China's financial capital, after it won strong support from the Shanghai government.

China's powerful and fast-expanding national pension fund, the National Social Security Fund (NSSF), is a strong possibility to become a key investor in the fund, according to a source briefed on Blackstone's fundraising plan in China.

NSSF could commit up to 40 percent of Blackstone's total target size, or 2 billion yuan ($293 million), said the source.

"Blackstone really wants to get the money from NSSF. In fact, it's not just about the money but more about the influence given NSSF's important role in China's financial system and that may help Blackstone win deals more easily in China," said the source.

"If successful, that would be a really big achievement for Blackstone in China and I will say all the other foreign funds will be very jealous," said the source declined to be identified as he was not authorised to speak to the media.

The deal, which would be a first investment by the NSSF in a yuan-denominated foreign fund, would be subject to special permission from the State Council, China's cabinet.

Dai Xianglong, head of NSSF and former chief of China's central bank, said in October that NSSF was preparing to boost its investments in private equity funds as the national pension fund may grow to 1 trillion yuan in a year, up from $80 billion at the end of 2008. [ID:nSHA282844]

"In China, its very hard to put a lot of capital to work if its non-Chinese capital... You've seen very few deals with scale there," Blackstone's Chief Operating Officer Tony James said on a conference call to discuss Blackstone's earnings, which were released on Thursday. [ID:nN25162463]

"That's why we're excited about the RMB fund where we can raise Chinese capital and be active in the Chinese market."

The yuan is also known as Renminbi, or RMB, and was introduced by the Communists. It literally means "people's money".

"It is still early," said James on the conference call, referring to the China fund.

"We have, I think, three commitments there now, and we're still in the market," he said, adding that he couldn't predict its ultimate size.

SHANGHAI SUPPORT

The allure of raising a local currency yuan fund is strong for global private equity firms such as Blackstone and Carlyle [CYL.UL], but setting up a yuan fund is problematic because only Chinese investors are allowed access under current Chinese rules.

This unique dilemma for fund-raising in China has drawn some concerns from foreign limited partners in some global funds due to potential interest conflict in deal-making. [ID:nTOE5B808T]

James did not comment on the conference call on who made the commitments and Blackstone declined comment on whether NSSF was one of those already committed. NSSF declined to comment.

Another investor for Blackstone's yuan fund is Lujiazui Finance (600663.SS), a major local developer focusing on Shanghai's Lujiazui financial district in Pudong, China's would-be Wall Street, said the source.

Lujiazui Finance, which helped Shanghai build some of its highest office builings served as headquarters for many foreign banks in China, had agreed in principle to commit up to 1 billion yuan in Blackstone's fund, the source added.

Shanghai city's government agreed to finance at least 20 percent of Blackstone's RMB fund capital, the source said.

Other private equity firms have been increasing their reach in China.

Rival buyout firm Carlyle said in January it plans to launch a China-dedicated, yuan-denominated private equity fund with support from the Beijing city government.

Carlyle's co-founder and Managing Director David Ruebstein told Reuters on Wednesday that the firm may finish the fund-raising for the yuan fund by the end of this year or even earlier. [ID:nTOE61N089] ($1=6.826 Yuan) (Editing by Carol Bishopric and Lincoln Feast)