BEIJING EASES LAW ON FOREIGN EQUITY

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

"China needs to develop more Rmb-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 only $2.44bn, compared with $7.3bn during 2006, after Beijing introduced new 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 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 both on partnerships and their individual partners, encouraging both domestic and foreign private equity groups to use a Cayman Islands-registered offshore structure.

Ms Wu's remarks follow China's May announcement that it would spend $3bn on a 10 per cent pre-IPO stake in Blackstone, the US private equity group.