Foreign money disadvantaged in China
By Paul Mackintosh - 14/05/12
One of the fondest hopes of foreign investors into the new ecosystem of RMB-denominated private equity was dashed this week – at least for the present – as China’s National Development and Reform Commission (NDRC) ruled that the presence of any foreign capital in an RMB vehicle will lead to it being treated as a foreign investor for the purposes of China’s investment regulations. This immediately calls into question the usefulness of the qualified foreign limited partner (QFLP) scheme, which was offered as the road into Chinese RMB private equity for global LPs, and sets back the efforts of TPG Capital, the Blackstone Group, the Carlyle Group and all the other greater or lesser international GPs who are struggling to launch vehicles to compete with the proliferation of domestic RMB funds now in the market.
The NDRC’s authority over this area is questionable in theory, with the Ministry of Commerce (MOFCOM) in theory being the relevant regulator. But the prospect of turf wars between regulators is no more encouraging for investors, least of all while MOFCOM fails to declare its stance. In terms of sector access, permissions and many other areas, anything branded foreign money remains disadvantaged in China.
The move is likely to retard rather than assist the development of China’s private equity industry. Transfer of knowledge from foreign GPs, and stricter international best practice oversight from global LPs, are two of the key incentives for letting outside capital participate in the RMB fund ecosystem in the first place, and the slapdash nature of many RMB fund structures is already being commented on at home and abroad. For as long as the rules promote a two-tier competitive environment in Chinese private equity, disadvantaging foreign investors for all their expertise, the structural quality of RMB funds will remain lower and the likelihood of some big and damaging Madoff-style bust in the sector will remain high.
Worse, though, the news comes at a poorly chosen time. China’s April trade figures, just released, show import growth at over 10% below forecast at 0.3% for the month, according to Reuters, while export numbers cited show export growth at 4.9% versus forecast 8.5%. And with inflation just back under control at 4% by Reuters figures, China’s room to use government-led stimulus to make up for the shortfall in demand at home and abroad looks increasingly limited. Yet China’s incremental reforms of its financial services sector have so far failed to deliver the savings and investment solutions needed to give its citizens the confidence to shift from saving to consumption.
China badly needs new money and expertise to transform its economic model, as commentators and policy-makers alike insist on the need to move away from old methods. The time for ambitious solutions is now. More than the future of RMB private equity depends on it.