Foreign Private Equity Firms Might Get the Chance to Go Local

by Shu on August 10, 2009

in Trade

Auguest 7, 2009

If Shanghai city officials have any say in the matter, that whole talk of Shanghai and Hong Kong becoming the new financial centers of the world might actually come true. Shanghai officials petitioned to the State Administration of Foreign Exchange (SAFE) in hopes of loosening restrictions for foreign private equity firms to be incorporated and operate in China. The city, which is currently preparing for the 2010 World Expo is making a significant push to become more international.

Over the past six months, a number of officials and journalists have suggested that with the collapse of Wall Street, and China’s relatively quick rebound, finance might soon have a new home in the Eastern hemisphere. China’s current policies towards foreign finance firms, however, have made it difficult for a true global presence to take root. According to a published report, a number of private equity firms have approached the Shanghai city government about Renminbi denominated funds, only to be told that the existing laws as dictated by SAFE make it difficult for a foreign firm to successful start one. Shanghai’s officials are petitioning the central government to allow concessions to be made on the city’s behalf.

If Shanghai had its way, the central government would allow foreign private equity companies to establish RMB denominated funds as long as they followed certain requirements. Firms interested in establishing a fund would need to be incorporated in Shanghai’s Pudong Special Economic Zone and 80% of any capital raised for a fund would need to be done in country. If these conditions are met, Shanghai officials hope that the central government would permit qualified P/E groups to incorporate as "local entities," despite their foreign interests and parties.

The central government’s own announcement this spring that it intended to help turn Shanghai into a global financial center suggests that the city government may, in fact get its wish. China’s financial system is still relatively underdeveloped compared to its Western counterparts, but the country is benefiting now, as government checks and balances over the markets played a role in protecting the country from the global downturn. The country is still fine tuning its IPO process and is also relatively inexperienced in the alternative investments arena. The China Investment Corporation (CIC) is one of the youngest, though biggest, sovereign investment funds in the world, hedge funds are largely restricted in the country, and the first domestic Chinese incorporated PE firm was not established until 2006. With more and more foreign firms interested in coming to Mainland China, and both the central and Shanghai governments indicating interest in establishing the city as a global financial powerhouse, major changes in a relatively short time to China’s regulatory process can be expected.

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