May 6, 2011 / 8:37 AM / 8 years ago

UPDATE 1-Shanghai reviews 2nd batch foreign PEs for China investment -sources

* Blackstone, Carlyle, DT Capital approved

* QFLP investors still face regulatory hurdles-analyst

* Government prefers funds co-invested by Chinese companies

* QFLP will expand to Beijing, Tianjin (Adds analyst quote, background)

By Samuel Shen, David Lin, Kazunori Takada

SHANGHAI, May 6 (Reuters) - Shanghai is reviewing a second batch of applicants for its pilot scheme to let foreign investors invest in yuan-denominated private equity funds in China for the first time, after approving Blackstone , Carlyle Group and DT Capital Partners, sources said on Friday.

Under the new Qualified Foreign Limited Partners (QFLP) programme, foreign private equity firms will be allowed to launch yuan funds in China using overseas capital.

In addition to major buyout funds, the Shanghai government hopes to award QFLP status to other types of foreign investors, such as venture capital funds, with a preference to those co-invested by Chinese companies, said the two sources with direct knowledge of the matter. They declined to be identified because they are not allowed to speak to the media.

“The government is hoping that foreign capital and expertise can boost China’s nascent private equity industry and aid economic restructuring,” said Poddy Feng, analyst at consultancy ChinaVenture in Beijing.

“But to the disappointment of many, QFLP investors will still be treated as foreign investors, who are subject to numerous restrictions when it comes to investing in Chinese companies.”

The first batch of QFLP investors was granted approval in late March and the city government is now working out the procedures so the companies can start raising money overseas.

More than 50 foreign private equity firms, including Blackstone, Carlyle and TPG have set up subsidiaries in Shanghai, where the government is encouraging them to launch yuan-denominated funds to help channel money into the private sector and improve corporate governance of local firms.


The QFLP scheme, which will also be adopted by Beijing and Tianjin, allows overseas investors to convert dollars into yuan for private equity investment in China under a certain quota, bypassing a procedure that requires obtaining approval from the country’s foreign exchange regulator on every deal they make.

However, these transactions would still require approval from the Ministry of Commerce, putting foreign funds at a disadvantage to their local rivals.

“The QFLP scheme won’t make a huge difference to our operations,” said one source. “It’s a small step, but in the right direction.”

Carlyle declined to comment, while venture capital firm DT Capital and buyout giant Blackstone could not be reached for comment.

Global private equity funds have been rushing to set up operations in China as they prepare to launch yuan-denominated funds in the world’s second-biggest economy.

In 2009, Blackstone became the first foreign buyout firm to unveil plans for a local-currency fund in China, aiming to raise 5 billion yuan ($770 million).

Carlyle has launched two yuan-denominated funds, in Shanghai and Beijing, in partnership with Chinese companies while another buyout giant, TPG also unveiled plans for two yuan funds in China worth 5 billion yuan each.

Foreign private equity investors have been able to invest in China through hard currency funds but they face numerous investment hurdles including lengthy approval procedures, tough regulatory scrutiny and complicated exit strategies. ($1 = 6.494 yuan) (Editing by Jacqueline Wong)

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