2009 proved to be a pivotal year in China's regulatory development of its nascent private equity market. The Chinese central government, as well as several municipal authorities, enacted a number of rules and regulations to enable RMB funds (investment funds whose capital commitments and contributions are denominated in China's domestic currency) to become the fund platform of choice for China's private equity market.

These new rules and regulations were released to encourage and facilitate the formation and operation of RMB funds, culminating with the State Council's November 2009 issuance of the "Measures for the Administration on the Establishment of Partnership Business by Foreign Enterprises or Individuals in China" (the "Measures"). Various municipalities also promulgated administrative measures to motivate foreign fund managers to set up operations in their municipality to manage RMB funds.

The momentum continued in the first quarter of 2010. The State Administration for Industry and Commerce has recently issued Decree 47, Administrative Measures for the Registration of Foreign-invested Partnership Enterprises (“Decree 47”), setting forth rules and procedures for the registration and operation of foreign-invested partnerships. With effect from March 1, 2010, foreign-invested partnership enterprises may be formed under PRC law pursuant to the Measures and Decree 47. These enterprises permit participation in RMB funds by non-PRC entities as general partners and also as limited partners.

The advantages of RMB funds include: the ability to raise funds from Chinese local investors, including high net worth individuals, onshore companies, government fund of funds, insurance companies and social security funds and the possibility of making investments without foreign exchange controls or foreign investment approval requirements.

However, a number of aspects remain unresolved for foreign private equity investors. For example, it is unclear whether international norms on fund flows can apply to RMB funds in relation to the conversion of foreign-currency denominated capital contributions and repatriations to foreign investors. It is expected that such aspects will be clarified in 2010.

2009 also saw capital raised for an array of new funds in China, including state-owned and industrial funds targeting a wide breadth of industrial sectors and further development of China's securities market, including the launch of the growth enterprise board (ChiNext) in 2009, which provides an additional domestic exit opportunity for private equity investors in China.

Foreign fund managers are reviewing the possibility of setting up RMB funds in China as a result of China's economic growth and the development of RMB funds. These foreign fund managers will nonetheless have to compete, for deals and capital, with the ever increasing number of domestic fund managers. Some foreign fund managers have abstained from launching RMB funds while seeking clarifications, sounding out joint venture partners and taking time to evaluate the implications. Others have established fund management enterprises in China in order to raise and manage RMB funds, while a few, such as Prax Capital Management Co., Ltd., received a green light to proceed with managing RMB funds. Indeed, two of Prax's RMB funds were launched and fully subscribed by Chinese domestic investors in 2009, indicating a keen level of interest in investing in private equity among Chinese investors.

For more information, please contact Phill Smith at phillip.smith@mayerbrown.com, Mark Uhrynuk at muhrynuk@mayerbrown.com, or Julie Zhang at julie.zhang@mayerbrown.com. Additional information on RMB funds and the opportunities in China please read the prior Mayer Brown RMB Funds Updates.

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