China Approves $3B Program for Foreign PE Investment

China’s foreign exchange regulator has approved a $3 billion pilot program that will allow foreign currencies to be converted into yuan for private equity investments, Reuters reported. The program would benefit private equity firms such as The Carlyle Group and Blackstone Group, which have been raising yuan-denominated funds, Reuters said, adding that the program would also give overseas pension funds and other investors a new avenue for investment in China. The program could begin as soon as December.

(Reuters) – China’s foreign exchange regulator has granted Shanghai’s government a $3 billion quota for a pilot programme that will allow other currencies to be converted into yuan for private equity investment, said two people with knowledge of the situation.

The authorities were likely to publish regulations and launch the Qualified Foreign Limited Partner (QFLP) scheme as soon as next month, a source said. However, there was concern in the industry that the move may be complicated by the government’s fight against hot money inflows.

The scheme is modelled after the Qualified Foreign Institutional Investor (QFII) programme, which allows foreign investors to buy domestic stocks and bonds.

It could benefit in the long run global private equity firms such as TPG [TPG.UL], Carlyle Group [CYL.UL] and Blackstone Group , which have been rushing to raise yuan-denominated funds, analysts said.

It will also give overseas pension funds, insurers, banks and securities firms a new channel by which to participate in the world’s fastest-growing major economy.

“The initial quota looks tiny, but it’s symbolically significant,” said Wesley Li, analyst at Beijing-based investment consultancy ChinaVenture. “Getting the quota will boost brand awareness and make future fundraising easier.”

China relaxed rules late last year allowing foreign companies to launch yuan funds as the government sought to channel more savings into the private sector to sustain growth.

Raising funds in yuan instead of in hard currency helps foreign private equity firms simplify legal structures and reduces regulatory hurdles to acquiring state-owned companies.

SAFE Quota

Shanghai had obtained in principle a combined quota of $3 billion from the State Administration of Foreign Exchange (SAFE), and planned to give three institutions $300 million each initially, according to a source.

Under proposed rules, qualified foreign investors under the QFLP scheme must have at least $500 million in capital or $1 billion in assets under management, and must have more than two years of relevant investment experience.

SAFE, the Ministry of Commerce and the Shanghai government were the governmental bodies involved in finalising regulations, sources said.

China’s recent campaign against speculative capital inflows amid growing inflationary pressure had raised concern that the QFLP scheme could be put on hold, especially after reports that another inbound investment scheme had been delayed.

The authorities had apparently shelved the so-called mini-QFII scheme, which allows overseas yuan to be invested in China’s capital markets, after the United States started a second round of quantitative easing, the Singtao Daily reported on Nov. 10. ($1=6.83 Yuan) (Reporting by Samuel Shen and Melanie Lee; Editing by Chris Lewis)