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China – NDRC Denies the “National Treatment” For RMB Funds With Foreign GPs.

29 July, 2012


Legal News & Analysis – Asia Pacific – China – Investment Funds


China’s National Development and Reform Commission (“NDRC”), one of the major regulatory authorities in charge of foreign investments in the People’s Republic of China (the “PRC” or “China”), recently denied the “national treatment” of RMB funds in the form of a limited liability partnership with a foreign-invested company as general partner (“GP”) and with only PRC domestic investors as limited partners (“LPs”). 
Foreign investments in China are subject to certain restrictions as well as various governmental approval procedures, which are often considered to be onerous and time-consuming. In early 2011, to attract the establishment of private equity funds, Shanghai, followed by Beijing and Tianjin, introduced the so-called Qualified Foreign Limited Partners (“QFLP”) program, under which, among others, a private equity fund formed as a limited liability partnership with a foreign-sourced GP and Chinese LPs and no foreign LPs would be deemed to be a Chinese investor for purposes of foreign investment regulations, provided that the GP’s capital commitment to the fund does not exceed 5% of the total capital commitments (the “5% Exception Rule”). Such “national treatment” exempts qualified funds from complying with China’s foreign investment regulation regime when such funds make investments in portfolio companies.  
The 5% Exception Rule is particularly attractive to those foreign fund managers who intend to raise capital only from China’s domestic sources while hoping to ensure that such type of funds receive equal treatment with their purely domestic private equity competitors (which are RMB funds with a domestic GP and domestic LPs) in the process of portfolio investments. Therefore, with other merits, the QFLP program has led to a surge in the number of RMB funds, especially in Shanghai, including funds managed by Blackstone Group, Carlyle Group, etc. 
In response to the Shanghai Development and Reform Commission’s request to clarify the “national status” of a fund with a PRC subsidiary of Blackstone Group as its GP, NDRC, however, issued a letter (The Reply Letter of the General Office of NDRC on Relevant Issues Relating to Foreign-invested Equity Investment Enterprises《国家发展改革委办公厅关于外资股权投资企业有关问题的复函)  on April 23, 2012 (the “NDRC Letter”), affirming that such type of RMB funds shall still be deemed as foreign investors, and their portfolio investments are therefore subject to the Catalogue for Guiding Foreign Investment (Issued by NDRC and China’s Ministry of Commerce on December 24, 2011), a major PRC regulation specifying the industry restrictions for foreign investments and other applicable PRC laws relating to foreign investments. 
The NDRC Letter denies the applicability of the 5% Exception Rule under the QFLP program to the effect that a contribution of even a nominal amount of foreign-sourced capital comprising a small fraction of the total fund size would make the fund “foreign.” It would also cause uncertainties as to the legality of the finished portfolio investments made by foreign-invested RMB funds if such investments had enjoyed the “national treatment” according to the 5% Exception Rule. 




For further information, please contact:

Lee Edwards, Partner, Shearman & Sterling

[email protected] 


Shearman & Sterling Investment Funds Practice Profile in China 



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