Private equity drive to raise renminbi funds

By Henny Sender in New York / www.ft.com
August 13 2009 23:27

US firms, such as Blackstone and the private equity arm of Goldman Sachs, are establishing investment companies in China to raise renminbi funds from local investors and take stakes in local companies with Chinese partners, according to people familiar with the matter.

The move is another step towards making the Chinese currency more widely available, and a further signal that Beijing is determined to improve the standard of corporate management in China.

The two private equity firms join banks such as Citibank, Bank of East Asia and HSBC in their ability to offer renminbi products.

By tying up with Chinese partners, Blackstone and Goldman hope to gain an advantage in securing deals in China. So far, foreign private equity firms have been frustrated by the relative lack of deal flow in a country where economic prospects are so seductive.

In many cases, planned investments have been sabotaged by competing Chinese companies claiming that foreign investment jeopardises China’s security.

Blackstone’s partner is expected to be the Peoples’ Government of Shanghai Pudong New Area, which has stakes in numerous companies that could potentially benefit from the private equity group’s operational expertise. Blackstone is expected to announce the new venture, which it hopes will raise 5bn renminbi, as soon as Friday in Shanghai. Goldman still has not selected its partner, but has many close relationships in China, for example with ICBC, the country’s biggest bank, and with Ping An Insurance.

“With the massive increase in domestic liquidity, continued growth of the Chinese economy and policy support from the central government to spur domestic investment, foreign investors are increasingly looking at the attractiveness of the domestic deal flow and the desirability of setting up an onshore investment platform and a renminbi fund to facilitate onshore deal-making,” lawyers at O’Melveny & Myers noted in a recent report.

However, it is still not clear, for example, whether such jointly owned ventures will be allowed to invest in sensitive industries in China, such as the media. Nor is it clear whether purely domestic funds would be favoured over these new funds in competitive bidding situations.

Moreover, as long as the Chinese currency is not freely convertible into other currencies, any profits are likely to stay in China.

China has steadily encouraged investors, financiers and companies with which it trades to use renminbi. Earlier this week, Citibank China said it had received approval to broaden its access to different types of renminbi bonds. China Construction Bank recently said it was exploring ways to offer renminbi dominated trade finance credit.

China’s efforts to promote the use of the renminbi are in part tied to concerns about the dollar. In recent months, Chinese firms have been encouraged to go abroad to acquire commodity-related firms and acquire physical stocks of commodities as an alternative to investing in dollar-denominated securities.