In the April, 2012, it was reported by various media sources that the National Development Reform Commission (NDRC) had issued certain policies requiring that an RMB fund (the “FIE GP Fund”) with a foreign invested enterprise (FIE) acting as the general partner (the “FIE GP“) and domestic investors (exclusive of FIEs established in China) acting as limited partners be regarded as a foreign investor. Being defined as a foreign investor means that the portfolio investments of such a FIE GP Fund shall be subject to foreign investment approvals, which are read by the public as referring to approvals from the Ministry of Commerce or its local counterparts(MOFCOM).

International private equity firms often structure their RMB funds in the form of FIE GP Funds, as a result this news caused great concern among them because their RMB funds will be defined as offshore funds in regard to making portfolio investments and as a result there will probably be little chance of raising new RMB funds in the form of FIE GP Funds. After reading the related document issued by the NDRC and based on information from various authorities, the authors believe that there is some misunderstanding in the market about the impact of this news.


Direct investment in China by foreign investors is subject to MOFCOM approval, and shall also be guided by the foreign investment policies, mainly the Catalogue of Industries for Guiding Foreign Investments (the “Foreign Investment Catalogue“), which categories industries into four types: encouraged, permitted, restricted and prohibited industries for foreign investment. Furthermore according to the Interim Provisions for Investment in China by Foreign Invested Enterprises[i], FIE’s investment in encouraged or permitted industries requires no MOFCOM approval, while FIE’s investment in restricted industries is still subject to approval. FIEs are not allowed to invest in prohibited industries. Current laws and regulations fail to address the treatment of investments made by an enterprise invested in by FIE(s), such as the FIE GP Fund, resulting in the uncertainty of whether the FIE GP Fund’s portfolio investments shall be subject to the Foreign Investment Catalogue and MOFCOM approval.

Before the issuance of the NDRC Reply to be discussed below, in the authors’ view, the treatment of FIE GP Funds shall be no less favorable than that to FIEs, which means, (i) the FIE GP Fund’s investments in encouraged or permitted industries shall not be subject to MOFCOM approval; (ii) due to the lack of regulation regarding the approval requirement and process, the FIE GP Fund’s investments in restricted industries shall not be subject to MOFCOM approval; and (iii) FIE GP Fund’s investments in prohibited industries is likely to be prohibited. Having said that, there exist uncertainties and local authorities in different areas may have different views and practices.

Breakthrough by Local Rules

The Shanghai Government made a breakthrough on this issue by promulgating the Implementation Measures on Foreign-invested Equity Investment Pilot Scheme in Shanghai (the “Shanghai Pilot Measures“) on December 24, 2010 and is widely recognized for its introduction of the concept of QFLP (Qualified Foreign Limited Partner). The Shanghai Pilot Measures also bring a favorable treatment (the ‘QFGP Treatment’) to the FIE GP Fund that, if the FIE GP is qualified and approved to participate in Shanghai’s pilot scheme, it may make up to 5% capital contribution to the FIE GP Fund and such capital contribution shall not affect the original nature of the FIE GP Fund, which means the FIE GP Fund will be treated as a domestic fund without foreign investment, regardless of the fact of its FIE GP’s capital contribution. Before the NDRC Reply, it was unclear whether that could be further aggressively interpreted to mean the FIE GP Fund’s portfolio investments shall not be subject to foreign investment policies. Also, whether the QFGP Treatment pursuant to the Shanghai Pilot Measures, a local policy, may be recognized in other areas outside Shanghai is still unclear.

The NDRC Reply

The authors understand that the said news came from the Reply on Relevant Issues Relating to Foreign-Invested Equity Investment Enterprises issued by the central level NDRC (the “NDRC Reply”) in response to the Shanghai NDRC’s request to clarify the applicability of the Foreign Investment Catalogue to the Blackstone RMB fund. 

We believe the Blackstone RMB Fund is in the form of FIE GP Fund receiving the QFGP Treatment according to the Shanghai Pilot Measures. The NDRC Reply clarifies that, the Blackstone RMB fund and other RMB funds in the similar structure (i.e., the FIE GP Funds) shall be administrated by foreign investment rules and policies and the Foreign Investment Catalogue is applicable to the portfolio investments of such funds.   

However, the NDRC Reply doesn’t require the FIE GP Funds to follow the MOFCOM approval processes for portfolio investments as if they are foreign investors, which is beyond the authority of the NDRC.

After the issuance of the NDRC Reply, relevant NDRC officials further explained at a non-public occasion that (i) the NDRC Reply was a reply to Shanghai NDRC’s request on specific issues, but not a new policy or regulation; (ii) when making portfolio investments, such FIE GP Fund shall go through the foreign investment project approval process with NDRC or its local counterpart. We understand even for foreign investors, such NDRC approval is often unnecessary in general M&A deals if no new construction project is involved. Given that “the NDRC Reply is not a new policy or regulation”, the authors tend to believe the same treatment regarding NDRC approval shall apply for the FIE GP Fund, and therefore, the impact on FIE GP Funds in respect of NDRC approval process may not be substantial.

Based on certain information from MOFCOM, we understand MOFCOM’s position is consistent with the NDRC Reply. MOFCOM also indicated that the FIE GP Funds shall follow the foreign investment policies, mainly the Foreign Investment Catalogue. No investment is allowed in the prohibited industries, but the investments in encouraged, permitted and restricted industries are generally allowed, provided that restrictions in restricted industries shall be followed (this appears not to be a big issue given that the restrictions are often the upper limit of foreign investment such as 50% etc., and the indirect foreign investment percentage in the FIE GP Funds is much less than that). In respect of the approval process, as indicated by MOFCOM, the FIE GP Fund’s portfolio investments are not subject to MOFCOM approvals, but prior oral consultation with MOFCOM before making investments is suggested, especially for investments in restricted industries.  


Based on the above, we believe the impact of the NDRC Reply is not as serious as indicated in the news. For the portfolio investments of FIE GP Funds, foreign investment policies, mainly the Foreign Investment Catalogue, shall be followed. However, in respect of the approval process, MOFCOM approval is generally unnecessary, and NDRC approval is required presumably for investments involving new construction projects, which is often not the majority of the portfolio investments of an FIE GP Fund. 

The NDRC Reply is not good news for the FIE GP Funds, but on the other hand, it brings about some certainty regarding the treatment of their portfolio investments. For the FIE GP Funds with no focus on the prohibited industries, the impact of the NDRC Reply may not be substantial.