China move to tighten funding to hit foreign buyout firms

May 8
12:11 PM 2012

China plans to treat local money raised and managed by global private equity firms as foreign funds, industry sources said on Tuesday, restricting their access to sectors such as media and mining in the world's second-biggest economy.

Foreign private equity firms such as Blackstone Group and TPG Capital Management have been setting up yuan-denominated funds in cities such as Shanghai, hoping they could be treated as local funds and thus avoid curbs on the sectors overseas funds can make investments in.

In a move aimed at ending regulatory ambiguity and tightening supervision, China's Ministry of Commerce (Mofcom) is formulating rules that will classify all foreign-run yuan funds as non-Chinese, one source with direct knowledge of the plan said on Tuesday.

The rules are set to introduced before the end of this year, the source, who did not wish to be identified because of the sensitivity of the matter, added.

"That would be a blow to foreign private equity firms as one of the main purposes of launching yuan funds is to become local," said Poddy Feng, analyst at consultancy ChinaVenture.

"Being treated as foreign means they're not allowed to invest in certain industries in China and there are also restrictions on ownership in some cases."

Mofcom wasn't available for immediate comment.

Global buyout firms such as Blackstone and Carlyle Group as well as investment banks such as Goldman Sachs Group Inc and Morgan Stanley have all launched yuan funds since 2009, hoping the funds will allow them to invest more quickly in a highly competitive market for deals.

China-focused private equity funds raised $32 billion in 2011, with yuan funds accounting for 68 percent of that sum, according to consultancy Bain & Co.

More than 60 yuan funds worth over 80 billion yuan ($12.68 billion) in total have been launched by foreign private equity and venture capital firms in the past four years, according to ChinaVenture.


Foreign private equity firms also invest in China through U.S. dollar funds, but there are numerous obstacles, including investment restrictions, lengthy deal approval procedures and uncertainty surrounding overseas listings.

They are not allowed to invest in sensitive industries, such as defense-related companies, and face restrictions on investing in mining, media, telecommunications, education and the Internet, among others.

In 2008, China rejected Carlyle's $375 million bid for Xugong, China's biggest construction equipment maker, citing concerns over foreign monopoly.

The plan by Mofcom echoed similar moves by the National Development and Reform Commission (NDRC), China's top planning agency. NDRC has ruled that all capital in a yuan-denominated fund must come from local Chinese investors, failing which the funds will be treated as foreign, the Wall Street Journal reported on Tuesday.

Mofcom and NDRC's attitude toward foreign private equity firms also reflect conflicting interests between China's local and central governments.

Shanghai has been aggressively courting global private equity and venture capital firms, hoping they can set up subsidiaries in the city to launch yuan funds.

Under Shanghai's own rules, it's widely understood that if a foreign private equity firm sets up a subsidiary in the city and raises money locally, that yuan-denominated fund would be considered as local.

This article is copyrighted by Reuters

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