- Various city governments adopting rules for private equity investment vehicles
- NDRC and CSRC anticipated to develop national rules on private equity
- Private equity funds set to drive growth in SME and high-tech sector
The city of Beijing is expected to formally release guidelines on the establishment of private equity investment funds. The new rules provide guidelines on how non-China-based firms can operate domestic investment vehicles and new rules on fund investment.
Beijing issued the new rules to coincide with the nation’s 60th anniversary celebrations. In addition, Beijing announced the creation of a new RMB 2 billion to RMB 5 billion guidance fund that would be able commit capital to help establish private equity investment funds in the city.
The new rules are anticipated to set forth guidelines for fund structure, standards for investors and management, registered capital, application procedures and preferential treatment for private equity investment funds, and allow foreign investors to set up locally registered enterprises, which may provide a platform for easier access to the China market given that the rules appear to resolve the legal status of global investment funds that seek to operate in China. Having a legal presence in China will make it easier for private equity firms to raise local currency funds. Under the current structure, private equity firms are limited to operating as investment consulting companies or representative offices with limited business scope.
China has experimented with different approaches to regulating private equity investments since at least 2007, when aviation industrial park Tianjin Binhai set up what was supposedly the first guidance fund in China. The Tianjin Binhai fund, which involved RMB 2 billion as guidance funds, is viewed as a model for other cities including Chongqing, Suzhou, Wuxi, Guangzhou, Jilin City and the Pudong area of Shanghai to set up guidance funds of their own.
Shanghai’s municipal government entered the market in June 2009 with the adoption of policies on the establishment of foreign-funded equity investment management enterprises. Under the new Shanghai policy, all foreign-funded venture capital and private equity companies in the Pudong district may be re-registered as foreign-funded equity investment management enterprises. Companies in Shanghai can register as foreignfunded limited liability equity investment management enterprises, and with a minimum registered capital of US$2 million. Then, in August 2009 Shanghai’s government publicly announced that the US-based Blackstone Group had signed a financial-cooperation memorandum with the Pudong District government to set up a RMB 5 billion fund to invest in China-based companies. Other funds were set up in Shanghai by CLSA Ltd. and First Eastern Investment Group.
The rules adopted to date have been designed and implemented at the local levels. The national government is in the process of developing its own set of rules to be jointly issued by the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission (CSRC). The NDRC has drafted rules to encourage China-based private companies to invest in more sectors including infrastructure, public services, finance, culture and education. Any rules adopted by the CSRC may override any policies at the local and provincial level. It’s an open question as to whether the local rules and anticipated national rules will be effectively implemented.