(WSJ) China’s state planning agency submitted a draft of rules governing local-currency private-equity funds to the State Council, according to a government official, a move that comes as Blackstone Group LP announced plans to raise a five-billion-yuan ($732 million) local fund.
Chinese officials have been debating the rules for setting up private-equity funds since at least 2007 and their submission to the State Council, China’s highest administrative body, indicates government officials could be close to reaching consensus on how to oversee the industry.
Infighting among regulators in Beijing over the rules has slowed the industry’s development, although a series of trial private-equity funds already are operating. Details of the draft rules submitted to the State Council aren’t known.
The private sector and local governments are moving ahead despite the lack of clarity from top officials. Blackstone Group is setting up the Blackstone Zhonghua Development Investment Fund in Shanghai Pudong New Area, the New York-based private-equity fund said in a statement.
Blackstone’s plan dovetails with China’s ambition to build Shanghai into an international financial center on par with Hong Kong, where many global financial institutions base their China teams. In June, the government of Pudong New Area laid out local rules guiding the establishment of foreign-invested private-equity management companies.
Howard Chao, partner in charge of O’Melveny & Myers’s Asia practice, estimates that there are more than 400 purely domestic yuan-denominated funds in operation and more than $1.5 billion of domestic funds that have foreign participation.
China wants a local private-equity industry that will allow Chinese investors to participate in big investment deals on similar terms to foreign investors. One key goal of the program is to encourage talented Chinese private-equity professionals to manage money on behalf of local investors instead of managing money only for foreigners.
The move by Blackstone came during a week in which the firm made a number of moves signifying its continued evolution into a global broad-based investment firm. Last Thursday, Blackstone sold $600 million of 10-year senior bonds, the firm’s first bond sale and a rare move for a private-equity firm. The company also announced last week that it had hired Byron Wien, Morgan Stanley’s longtime markets guru, as its chief investment strategist.
The China venture could make Blackstone the first major global buyout firm to establish an onshore presence in China. Blackstone sold a stake in its management company for $3 billion to China Investment Corp., the country’s $300 billion sovereign-wealth fund, ahead of Blackstone’s initial public offering of stock.
Blackstone also paid $600 million for a 20% stake in Chinese chemical maker China National BlueStar (Group) Corp.
Global firms such as Carlyle Group and TPG have dominated the private-equity scene in China to date, and they expect local private-equity firms will provide tougher competition for deals because domestic-currency funds face fewer regulatory hurdles.
By setting up a local fund, Blackstone will be subject to less regulatory issues because it will represent local investors. One of the biggest challenges for onshore funds managed by foreign partners is how to divide deals between their global and local funds.
Chinese regulators have broadly agreed to regulate funds larger than five billion yuan more stringently than smaller funds. The National Development and Reform Commission, the state planning agency, has spearheaded the creation of industrial investment funds larger than five billion yuan, but many of those have had difficulty with fund raising because of some limitations on their sector and geographic scope.
By not being larger than five billion yuan, Blackstone’s fund will have more flexibility. Blackstone said in the announcement it will give priority to investments in Shanghai and neighboring areas.