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China to accept foreign private equity buyouts { June 6 2007 }

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Beijing moves to encourage private equity
By Jamil Anderlini and Sundeep Tucker in Hong Kong
Financial Times
Updated: 10:40 p.m. ET June 6, 2007

China on Wednesday signalled it was prepared to accept foreign private equity groups, following last week's introduction of a law to encourage its fledgling domestic private equity industry.

"China needs to develop more renminbi-denominated investment funds," said Wu Xiaoling, deputy governor of China's central bank, adding that lack of a thriving domestic private equity industry was a "soft rib" in the country's capital market development.

"We hope foreign private equity can make more use of the Rmb market and develop more Rmb-denominated funds," she told a seminar in Tianjin.

Global giants such as Texas Pacific Group, Carlyle Group and KKR have faced stiff political opposition to their investments in China as Beijing has tried to develop domestic private equity and venture capital players.

Total private equity investment in mainland Chinese companies so far this year has slowed to $2.44bn (€1.8bn), compared with $7.3bn in 2006, after Beijing introduced legislation last September to block the use of an offshore corporate structure used by most homegrown and inter­national private equity groups.

But Ms Wu's comments indicate that Beijing has resigned itself to allowing foreigners into the market and is trying to get them to localise operations and sell more investments through the mainland capital markets, instead of listing companies abroad.

A new law that came into effect last Friday establishes a legal framework for private equity and venture capital funds in China, by recognising their unique structure and simplifying the taxes they have to pay. "The new law really throws the door wide open for onshore private equity and venture capital Rmb-denominated funds," says Lester Ross, managing partner at WilmerHale law firm in Beijing.

The law allows large investors in investment funds to enjoy limited liability and removes a rule that imposed taxes on partnerships and their individual part­ners, encouragingdom­estic and foreign private equity groups to use a Cayman Islands-registered offshore structure.

Ms Wu's remarks follow China's announcement last month that it would spend $3bn on a 10 per cent pre-listing stake in Blackstone, the US private equity group. More than 90 per cent of corporate financing in China comes from bank loans.

© The Financial Times Ltd 2007. "FT" and "Financial Times" are trademarks of the Financial Times.Copyright The Financial Times Ltd. All rights reserved.

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