Topics in Chinese Law - RMB Funds: Update and Trends

August 1, 2009
Because of the inconvertibility of the Chinese Renminbi currency ("RMB") and various other regulatory constraints, there have historically been two separate universes of private equity deals in China: domestic deals denominated in RMB, and foreign deals using offshore holding companies that invest in Chinese operating subsidiaries. However, a series of changes to Chinese regulations, culminating in the implementation of the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors (commonly known as the "M&A Rules") in September 2006, have made it very difficult to restructure a Chinese domestic company into an offshore holding structure (to facilitate offshore investments into such domestic companies) and all offshore investments by foreign investors since then have involved only Chinese companies that were already held by way of an offshore holding company. On the other hand, with the massive increase in China's domestic liquidity, continued growth of the Chinese economy, and policy support from 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 investments platform (that is, a "RMB Fund") in order to facilitate such onshore deal-making.