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Report: Beijing secures approval for QFLP scheme

The Chinese capital has reportedly joined Shanghai in securing the necessary backing from China’s central government to launch a currency conversion programme for offshore LPs. Further detail on Shanghai’s QFLP scheme has also emerged.

Beijing has joined Shanghai in being granted the green light to launch a qualified foreign LP (QFLP) scheme, according to Chinese local media reports.

The Beijing scheme, which would allow the conversion of foreign currency into RMB for investment into private equity funds, is likely to be formally announced before the start of Chinese New Year on 3 February, according to Chinese news website Caijing.

Like Shanghai, Beijing would also likely be granted a $3 billion conversion quota by the State Administration of Foreign Exchange (SAFE) to be allocated between select private equity managers, a separate report in business news website Caixin stated.

SAFE was unavailable to comment on the reports.

Separately, industry sources have given PEI Asia more information on the rules and reach of Shanghai QFLP scheme, which was first announced in October.

For LPs, the key question posed in the wake of the announcement was whether the resultant comingled funds would be treated entirely as domestic capital, or whether they would continue to be treated as foreign capital. Currently, RMB-denominated funds enjoy significant advantages over their USD counterparts in China due to restrictions imposed on the investment of foreign capital.

According to two sources, comingled funds will continue to be treated as foreign capital – that is, subject to certain restrictions, for example around the sectors they can invest in. However, many of the time delays associated with the processing of proposed USD investments, a considerable hurdle for offshore capital, would be avoided.

In terms of processing the conversion into RMB, one source told PEI Asia that a private equity fund must first raise the money in USD before it can apply for the conversion into RMB. This means LPs must commit to a GP without the certainty that their investment will be approved for conversion.

In addition, the government is more likely to approve conversion if a fund is also looking to raise money from domestic LPs, the source stated. However, in contrast to information that was disseminated when the QFLP was first announced, he added that there were no restrictions on the final ratio of USD to RMB in the fund.

In October, a statement from law firm Debevoise & Plimpton said qualified foreign LPs would be able to convert foreign currency for investment into an onshore RMB-denominated fund established in Shanghai, as long as the aggregate quota for foreign-originated capital did not exceed 50 percent of the total size of the fund.

The latest information would seem to suggest, however, that if a fund applies for the currency conversion after it has raised a certain amount of US dollars, the Chinese government may approve the conversion even if it proves unable to raise any domestic money in the end.

Global private equity firms The Carlyle Group and The Blackstone Group are among the selected beneficiaries to test the Shanghai programme as the local government believes them to be more cautious in doing deals, the same source told PEI Asia last year.

Currently, foreign currency conversion for the purposes of investment is restricted in China under law Circular 142, issued in 2008 by SAFE.