Renminbi Qualified Foreign Limited Partner: an incremental step toward RMB internationalization in the private equity industry

by Sheppard Mullin Richter & Hampton LLP
Contact

In a number of incremental steps, the PRC government has been easing restrictions on the cross-border movement of RMB. The latest step for the private equity industry is the Renminbi Qualified Foreign Limited Partner Program (“RQFLP”), which permits offshore-raised RMB to be invested in PRC companies by PRC private equity funds and managers.

Incremental Steps Toward Internationalization

The PRC government is in the process of gradually internationalizing the RMB use for trade and investment. Commentators have surmised that the objective of these incremental steps is to facilitate RMB flows as needed for real operations, while keeping a tight rein on currency speculation.

Regarding currency generated or used in operations, the PRC has eased restrictions governing cash management for multi-national operating companies (“MNC”). For example, the People’s Bank of China recently began permitting certain MNCs to consolidate all incoming or outgoing RMB transactions over a given period into a single payment, rather than requiring approval for each individual transaction. Similarly, last September, the State Administration of Foreign exchange launched a pilot program that allows approved companies to sweep foreign currency generated in China into a single overseas account.

The PRC is also incrementally liberalizing incoming and outgoing currency flows for investment funds. In 2011, Shanghai unveiled its Qualified Foreign Limited Partner program (“QFLP”). Under the QFLP, foreign-invested private equity funds and fund management companies were permitted to convert their foreign currency capital into RMB in order to invest into RMB funds. Factors for foreign funds to be qualified participants under the program included whether (i) the fund identified investors and obtained firm commitments from such investors; (ii) the management team has sufficient PRC investment experience; (iii) the fund had certain favoured investors such as government guidance funds or SOEs; (iv) the fund established a governance structure, investment plans, and capital contribution, distribution and allocation mechanism.

Following the QFLP, the Renminbi Qualified Foreign Institutional Investor (“RQFII”) program was launched in December of 2011. Under the RQFII, Hong Kong subsidiaries of approved PRC securities firms were permitted to raise RMB funds in Hong Kong to invest in the PRC securities markets. Each firm was limited to a quota determined by the State Administration of Foreign Exchange (“SAFE”). RQFII investments are limited to stocks, bonds and warrants traded on stock exchanges, fixed-income products traded on inter-bank bond markets, securities investment funds, stock index futures and other financial instruments permitted by the CSRC.

Both the QFLP and the RQFII were designed to attract RMB currency that has pooled offshore. By providing a mechanism to return offshore RMB to the PRC, the RQFLP is the next small step towards internationalizing RMB currency in the investment industry, and particularly for private equity firms.

RQFLP Features

RQFLP is effectively an extension of the QFLP, and also follows in the wake of the RQFII. The RQFLP is an extension of the QFLP in that it permits qualified foreign-invested private equity funds to use offshore RMB (as opposed to foreign currency) from qualified foreign investors to make investments in PRC companies. The RQFLP also avoids the necessity of obtaining foreign currency exchange approval. Like the RQFII, RQFLP funds raise and deploy offshore RMB. However, unlike RQFII, the foreign invested fund may invest in convertible instruments, private companies, and private placements in listed companies.

Qualified RQFLP participant funds will include Hong Kong subsidiaries of PRC investment firms and foreign fund managers with an established record and offshore-RMB fundraising capacity. In the PRC, the RQFLP fund will set up a foreign invested fund manager (“FIE Manager”) with registered capital of USD 2 million or a foreign-invested fund (“FIE Fund”) with registered capital of US 15 million to act as a general partner onshore. Each foreign investor in the FIE Fund must own assets of US 500 million or have US 1 billion under management. Limitations for investors in Fund Managers have not been specified.

RQFLP Limitations

The RQFLP is geographically limited to Shanghai’s Pudong New Area (though Chongqing government has been reported to open a similar program). It is capped at RMB 1 billion. The QFLP was also initially subject to caps that were expanded shortly after the program was introduced. Likewise, RQFII was initially capped at RMB 6 billion but has expanded to RMB 270 billion. Elevated cap amounts do not, however, correlate to private equity investment. Despite the higher cap, as of last January the QFLP had only raised RMB 15 billion, most of which has not been deployed.

Perhaps the biggest disappointment is that RQFLP funds will still be treated as foreign investors according to the Reply Letter of the General Office of NDRC on Relevant Issues Relating to Foreign-invested Equity Investment Enterprises, 2012 (1023). The letter emphasized that any amount of funds provided by foreign limited partners would make the fund “foreign” and would still be treated as a foreign investment. Therefore, investment into a PRC company by an RQFLP fund will convert the PRC company from a domestic entity to a foreign invested entity (“FIE”). FIE’s cannot invest in certain sectors and must comply with Catalogue for the Guidance of Industries of Foreign Investment.

As practical limitation on both RQFLP and PRC ambitions to internationalize the yuan, the total amount of accessible offshore RMB is a estimated to be a modest RMB 1 trillion . Only a fraction of those funds, which includes dim-sum bonds and certificates of deposit, will be available to fundraisers for RQFLP investment.

Impact

Although RQFLP is a discrete step toward RMB internationalization, it is not likely to generate tremendous amounts of investment inflows.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sheppard Mullin Richter & Hampton LLP | Attorney Advertising

Written by:

Sheppard Mullin Richter & Hampton LLP
Contact
more
less

Sheppard Mullin Richter & Hampton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.