February 01, 2011

Implementing Measures for the Pilot Program of Foreign-Invested Equity Investment Enterprises in Shanghai

Issuing Body: Shanghai Municipal Financial Service Office, Shanghai Municipal Commission of Commerce, Shanghai Administration of Industry and Commerce
Issuing Date: December 24, 2010
Effective Date: January 24, 2011

Shanghai, China's de facto financial capital, is again on the forefront of the nation's economic development, introducing a pilot program that for the first time allows foreign investors to convert foreign currency into renminbi that can then be used for equity investments in other companies or investment funds. The Implementing Measures for the Pilot Program of Foreign-Invested Equity Investment Enterprises in Shanghai (Equity Investment Pilot Measures) were jointly enacted on December 24, 2010, by the Shanghai Financial Office, the Shanghai Municipal Commission of Commerce, and the Shanghai Administration for Industry and Commerce (Shanghai AIC). They took effect on January 24, 2011.

Until now—and still, in the rest of China—foreign investors wanting to invest into or establish RMB investment funds have had to work with a domestic joint-venture partner because the State Administration of Foreign Exchange (SAFE) generally prohibits foreign investors from converting foreign currency into renminbi for equity investment purposes. The Equity Investment Pilot Measures establish a pilot program that allows qualified foreign investors to invest in RMB investment funds with RMB converted from foreign currency.

The Equity Investment Pilot Measures permit two types of investment enterprises: foreign-invested equity investment management enterprises (Management Enterprises) and foreign-invested equity investment enterprises (Investment Enterprises). Management Enterprises typically function as general partners, actively managing the daily operations of a fund, making investment decisions, and assuming unlimited liability for the fund. Investment Enterprises are typically limited partners, investing passively without taking part in daily operations or decision-making (and having limited liability).

Management Enterprises

The Equity Investment Pilot Measures define a Management Enterprise as a type of foreign-invested enterprise that engages in 1) sponsoring and establishing an RMB investment fund or funds; 2) providing investment management and related services to RMB investment funds; and 3) providing equity investment consulting services. As noted above, a Management Enterprise usually acts as the general partner of an RMB investment fund.

A Management Enterprise may be established in the form of a partnership or a limited liability company. It must have a minimum capital commitment or registered capital of US$2 million or its equivalent, contributed in cash.

A Management Enterprise must have at least two senior management personnel with 1) at least five years' experience in the equity investment business or equity investment management business; 2) experience in equity investment in the People's Republic of China or experience working for financial institutions in the PRC; and 3) no violations of relevant regulations in the previous five years.

If the Management Enterprise is in the form of a company, its establishment requires prior approval of the Shanghai Commission of Commerce and registration with the Shanghai AIC; if the Management Enterprise is a partnership, registration with the Shanghai AIC is required. The Commission of Commerce or Shanghai AIC will consult the opinion of the Shanghai Financial Office for the establishment of a Management Enterprise.

Investment Enterprises

In accordance with the Equity Investment Pilot Measures, an Investment Enterprise is a type of foreign-invested enterprise that 1) uses proprietary funds to make portfolio investments, including, among others, investments in the formation of new enterprises, investments in existing enterprises, and the acquisition of an equity interest in existing enterprises; 2) provides management consulting services to its portfolio enterprises; and 3) conducts other businesses permitted by the authorities.

Investment Enterprises are prohibited from:

  • investing in sectors that fall within the prohibited category for foreign investors;
  • trading in shares and enterprise bonds on secondary markets (except for shares held after the listing of portfolio companies);
  • engaging in financial derivative transactions;
  • directly or indirectly investing in real property other than property for its own use;
  • misappropriating non-proprietary funds for investment; and
  • providing loans or security to a third party.

An Investment Enterprise may be established in the form of a partnership. It must have minimum aggregate capital commitments of US$15 million or its equivalent, contributed in cash. Theoretically, an Investment Enterprise may be established as a company, but there is no provision in this regard in the Equity Investment Pilot Measures. Each limited partner must invest US$1 million or more as its capital commitment. This requirement does not apply, however, to a general partner.

An Investment Enterprise that is established as a partnership may do so upon registration with the Shanghai AIC. The Shanghai AIC will consult the opinion of the Shanghai Financial Office before completing the registration.

Investment Enterprises are required to enter into a custody agreement with a qualified bank to open a custody account to hold and supervise funds.

Pilot Qualification Recognition

If either a Management Enterprise or an Investment Enterprise intends to use its foreign currency to invest in an RMB investment fund, it should apply for pilot qualification recognition to a joint commission established by various government agencies, including the Shanghai Financial Office, the Shanghai Commission of Commerce, the Shanghai AIC, and the Shanghai branch of SAFE (collectively, the Joint Commission).

After obtaining approval, a Management Enterprise will be allowed to convert foreign currency into RMB and contribute the currency as capital to RMB investment funds that are sponsored and established by the enterprise. An Investment Enterprise will be allowed to use foreign currency capital commitments from foreign investors to make investments in China.

An applicant for pilot qualification (or one of its affiliates) must have at least three years' experience investing in enterprises in the PRC.

Foreign investors in an Investment Enterprise applying for pilot qualification must be institutional investors recognized by the Joint Commission (such as sovereign funds, pension funds, charity funds, funds of funds, insurance companies, commercial banks, and securities companies). They must 1) have proprietary assets of no less than US$500 million or have assets under management of no less than US$1 billion for the financial year immediately preceding the application; 2) have sound corporate governance and a complete internal control system, with no penalties by any court in China or relevant regulatory authority in the last two years; and 3) have at least five years of investment experience.

Qualified Management Enterprises and qualified Investment Enterprises are subject to ongoing reporting obligations to relevant supervising authorities once every six months.

The Equity Investment Pilot Measures say that if a Management Enterprise with pilot qualification converts its foreign currency into RMB for investment in an RMB investment fund, and that amount does not exceed 5 percent of the fund's aggregate capital commitments, the foreign currency converted will not change the nature of the RMB fund in which the Management Enterprise has invested. It appears that an RMB investment fund established under such circumstances (Management Enterprise as a general partner and PRC investors as limited partners) may be treated as a domestic partnership instead of foreign-invested partnership, and thus will be less regulated and not subject to restrictions on foreign investments.


While relatively few institutional investors will be able to meet the high standards contained in the Equity Investment Pilot Measures—and while those investments will be under strict supervision—the new rules offer foreign qualified institutional investors new ways to invest in Shanghai if not all of China. Since this is a pilot program, regulators and legislators will surely assess its impact with an eye towards the possibility of expanding it.

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