Shanghai’s QFLP, the plot thickens

It has been reported that China’s State Administration of Foreign Exchange has allowed the Shanghai government to greenlight the conversion of $3bn into RMB for investment into private equity funds. Whether this money will be treated as local capital still remains unclear.

Following the announcement in October that Shanghai had received approval from China’s central government to launch a qualified foreign LP (QFLP) scheme, there have been reports talks are under way to allocate conversion quotas to specific private equity managers.

Earlier this month, an industry source told PEI Asia that Shanghai had secured approval from China’s State Administration of Foreign Exchange (SAFE) to allow the conversion of “a few billion dollars” into RMB for investment into private equity funds.

In addition, the source said the Shanghai government had been in talks behind closed doors with a few big-name foreign private equity firms and even fund of funds managers to set up this kind of comingled RMB funds. 

“They are basically saying, you private equity funds go ahead and do this, we the government will give you the support,” the source said.

According to the source, the Shanghai government wants established GPs to be the first beneficiaries of the programme because they are more cautious in doing deals.

“They also want someone who is committed to the Shanghai market,” the source added.

On Thursday, Reuters reported a similar development, saying that SAFE had granted the Shanghai government a $3 billion quota to be converted into RMB. It added that Shanghai planned to give three institutions a $300 million conversion quota each initially.

Shanghai Finance, the government body that leads the effort of the pilot programme, declined to comment. SAFE could not be reached by press time.

Talk of these quotas seems to contradict the information on Shanghai’s QFLP scheme that was circulated in October, when it was first announced.

Then, 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.

However, Hubert Tse, a partner at Chinese law firm Boss & Young in Shanghai, told PEI Asia in October there had been talks about limiting the foreign currency conversion quota to 30 percent, and added that there might also be a $100 million cap on foreign capital converted per fund.

It is unclear what the limits set by Shanghai’s QFLP scheme on the conversion of foreign currency into RMB will be. Neither has the latest development clarified any of the other uncertainties that surround the scheme – according to Reuters, further detail on the QFLP scheme, which was initially due to be released by Shanghai in November, will be published next month.

Among the most important questions for foreign LPs is whether the comingled RMB funds will be treated like onshore funds, or whether they will instead continue to be treated like foreign capital.

Currently, foreign currency conversion for the purposes of investment is restricted in China under a 2008 law from the SAFE called Circular 142, which prohibits foreign-invested RMB funds from undertaking onshore private equity investment in China.

The QFLP programme is seen as a potentially significant step in leveling the playing field between foreign and domestic LPs in China, given that RMB funds enjoy significant advantages over their USD counterparts when it comes to investment in China.

However, if the comingled fund continues to be treated like foreign currency, i.e. subject to investment restrictions and delays, then its only benefit will be to Chinese GPs who wish to raise money from diverse sources, LPs told PEI Asia recently.