Shanghai quietly launched a new pilot programme, RMB Qualified Foreign Limited Partner (RQFLP), towards the end of 2012 to permit qualified foreign fund managers and asset management companies to raise offshore RMB from offshore investors to invest in RMB private equity funds set up in Shanghai.
The RQFLP pilot programme is deemed to be an extension of Shanghai's Qualified Foreign Limited Partner (QFLP) programme, effected in 2011, which allows qualified foreign invested private equity funds and fund management companies to convert their own foreign currency capital and foreign currency capital raised from other foreign investors into RMB for capital contributions to RMB private equity funds (see our Legal Update, RMB Funds - QFLP Pilot Programs - An Update, issued on 12 May 2011).
The RQFLP is also modelled after the RMB Qualified Foreign Institutional Investor (RQFII) programme, which serves as a channel for offshore RMB capital to be used for public securities and debt investments in China (see our Legal Update, RQFII Rules: New Ways to Use Offshore RMB - Part II, issued on 4 January 2012).
Distinctive Features of the RQFLP Programme
The RQFLP pilot programme differs in some major ways from the QFLP and the RQFII programmes:
Use of offshore RMB: Unlike the QFLP programme, qualified foreign participants under the RQFLP programme will use offshore RMB as opposed to foreign currency to make capital contributions to RMB private equity funds in Shanghai.
Private Investments: Unlike the RQFII programme, which is limited to investments of offshore RMB in China's public securities and debt markets, the RQFLP programme is for the use of offshore RMB capital to make equity investments in non-listed companies, private placements in listed companies and industry investment funds in China.
Qualifications for the RQFLP Programme
The participants in the RQFLP programme are intended to include both well-established foreign fund managers with the fundraising capacity for offshore RMB and the Hong Kong subsidiaries of Chinese asset management companies and brokerage firms. It is reported that Haitong International Securities Group Limited (the Hong Kong-based subsidiary of Haitong Securities Companies Limited) and SBI Holdings Inc have been approved under the programme, with certain quotas, to raise offshore RMB capital and to inject such offshore RMB capital into private equity funds to be formed in Shanghai. However, detailed rules and procedures for remittance and repatriation of offshore RMB capital under the RQFLP programme still need to be further developed.
No National Treatment
An important issue for the RMB private equity funds under the RQFLP programme is "national" treatment. The National Development and Reform Commission, in a letter to the Shanghai Development and Reform Commission in April 2012, clarified that a QFLP fund, i.e., an RMB fund in the form of a limited partnership managed by a qualified foreign invested management company as the general partner (whether or not any of the capital committed/contributed to the fund is from that general partner or another non-PRC investor), does not enjoy "national" status and its investments are therefore subject to the Catalogue of Industries for Guiding Foreign Investments (see our Legal Update, NDRC Clarifies Foreign Investor Status of Foreign Invested RMB Funds, issued on 16 May 2012). There is no breakthrough for an RQFLP fund on this issue. Offshore RMB is considered to be foreign capital, therefore, an RMB private equity fund that accepts offshore RMB contributions under the RQFLP programme will be considered to be a foreign investor and subject to relevant rules and regulations for foreign investments.
The RQFLP programme, as part of the Chinese government's general efforts to promote the internationalisation of the RMB, will assist in increasing the channels for offshore RMB to flow back into China and in increasing investment opportunities for investors holding RMB offshore. It also has the potential to provide an additional capital source for private equity funds in China although, in the near term, the impact of the programme on the private equity industry in China may be limited.