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Shanghai. A few weeks ago, Stephen A. Schwarzman, the chairman of the Blackstone Group, the world’s biggest private equity firm, signed a joint venture here with Shanghai’s municipal government, creating the first Blackstone fund denominated entirely in Chinese currency.

The $732 million fund was the latest example of two trends: global private equity firms seeking to raise capital from increasingly wealthy Chinese individuals and institutions and the growing international stature of the Chinese currency, formally known as the renminbi.

Chinese private equity funds are emerging in big cities as China promulgates new regulations aimed at creating a homegrown private equity industry, one that Beijing hopes will strengthen the country’s capital markets and fuel private sector growth in an economy overly dependent on government investment.

Industry experts say that to compete with China’s growing funds, global firms like Blackstone, the Carlyle Group and even the buyout firm Kohlberg Kravis Roberts are scrambling to form funds denominated in renminbi.

Analysts say it has suddenly become the currency of choice for private equity firms operating in China.

“Now, more and more deals are being done with local funds,” said Wang Chaoyong, chairman of China Equity, a large private equity firm based in Beijing. “Even internationally invested companies are switching to local currency.”

Blackstone, Carlyle and KKR declined to comment.

There are still major obstacles to forming funds in the Chinese currency. The laws regulating such funds are still vague. China is ostensibly communist, and skeptics say private-equity-style investing is so new here that many wealthy Chinese, as well as many government agencies, may be reluctant to commit huge amounts of money.

“It’s the right thing to do strategically, if you take a holistic approach,” said Robert Partridge, a managing director at Ernst & Young in Hong Kong. “But to implement this is still a challenge.”

Indeed, Blackstone’s move comes after the Chinese government bought a $3 billion stake in the firm before its 2007 initial public stock offering.

Blackstone’s shares have tumbled since then, but the firm has accelerated its push into China.

Analysts say global private equity funds like Blackstone are hoping to tap the enormous pool of wealth now being amassed in China. Companies and government agencies are flush with cash, and the number of high-net-worth individuals has soared in recent years.

Regulators have already made it easier for private equity investors to take pre-IPO stakes in private companies that plan to go public in China, which is now the world’s biggest market for such offerings.

C. G. Wu, the China chairman at CLSA Asia Pacific Markets, says that under the new rules, private equity funds can cash out, or exit, using the Chinese stock market rather than going through a more complicated process that involves listing on overseas stock exchanges.

Wu’s firm recently formed a $1.4 billion Chinese-currency private equity fund with a state-owned company in Shanghai.

More than 190 funds denominated in the Chinese currency, with more than $30 billion in combined capital, have been established during the last two and a half years, according to Zero2IPO, a Beijing-based research firm.

Among them is a $2.9 billion private equity fund created by the China International Capital Corporation, the country’s biggest investment bank, which is partly owned by Morgan Stanley.

Until now, private equity here has been dominated by global funds investing dollar-denominated assets.

For at least a decade, global funds acquired stakes in Chinese start-ups. To get around government restrictions on foreign investments, the funds helped the Chinese companies create offshore holding companies, putting the deals largely beyond the reach of Chinese regulators.

The complex deals, often done in tax havens like the Cayman Islands, successfully financed some of China’s most dynamic young companies, including Internet start-ups like Baidu and Alibaba.com, consumer brands like Li Ning, and real estate giants like Soho China and Country Garden.

But the offshore investments also annoyed Beijing by exploiting tax loopholes and pushing many Chinese companies to seek stock listings outside mainland China on exchanges like Hong Kong or Nasdaq, where global investors could more easily sell their holdings.

Hong Kong’s bourse is considered an offshore exchange since it is not governed by Beijing regulators.

But now, if Beijing has its way, wealthy Chinese funds would help finance China’s budding entrepreneurs, who Beijing hopes will more often than not list on Chinese stock exchanges like the recently opened ChiNext, a Nasdaq-style exchange that got off to a strong start a few weeks ago. That would provide fund investors with easier access and exits.

“We see more deals being restructured to target the local capital market,” says Lawrence H. Sussman, a lawyer at O’Melveny & Myers.

Some analysts say the new system could reshape the way capital is allocated in China and serve as another step in the country’s transition to a more market-oriented economy.

“The market is becoming more efficient,” said one prominent Beijing-based fund manager, who asked not to be identified because of sensitivity about how the government was reshaping the market.

“China’s stock market may finally become a true allocator of capital rather than just a financing tool of the Ministry of Finance.”

Analysts say the changes are occurring because government regulatory agencies are pushing the formation of an onshore Chinese private equity industry.



The New York Times