By Zhang Yi, Partner, & Alan Du, Counsel, Corporate Group, Shanghai

The Administrative Measures for Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (the “Measures”) was issued by State Council on 2 December 2009. The Measures, effective from 1 March 2010, will allow foreign investors to directly act as partners of partnerships in China.

Without the Measures, the existing Partnership Enterprise Law itself does not allow foreign investors to directly invest in partnerships due to a provision which says such circumstances will be subject to administrative measures to be issued by State Council. Though with such restrictions, international PE/VC firms still appear to prefer using limited partnership as the form of RMB fund, and try the approach of setting up a foreign invested company acting as the general partner and raising fund from domestic investors, which proves practicable in some areas of China. Nonetheless, due to the foreign exchange control in China, a limited partnership cannot receive substantial funding from foreign investors even in such an indirect way.

The Measures generally allow a foreign investor to act as a general partner or limited partner of a limited partnership, but it is still too early for PE/VC firms to celebrate the opening of door. The Measures indicates that for foreign enterprises or individuals setting up partnerships in China with the main business of investment, special laws or regulations in this regard could apply. According to the answers of the Legal Affairs Office of State Council explaining the Measures to journalists, the authorities has not figured out a clear position on partnerships with the main business of investment, such as venture capital enterprises and private equity funds etc., and thus the relevant wording in the Measures is flexible. As a general practice in China, the implementation of the Measures will require detailed rules, which may address this issue further.

The Ministry of Commerce and its local counterparts (“MOC”) has been the main approval authority for foreign invested enterprises for decades, but the Measures take a different approach for foreign invested partnerships (“FIP”). An Application for the establishment of an FIP shall be submitted to the local administration of industry and commerce as authorized by the Sate Administration of Industry and Commerce (“AIC”). MOC will only be notified of the registration information upon the establishment of an FIP. An FIP is still subject to foreign investment industrial policies, including the Foreign Investment Industry Catalogue, and the AIC will review an explanation on compliance with foreign investment industrial policies as part of the application process. We would like to put a question mark on the consistency between AIC and MOC in applying industrial policies to FIPs and other foreign invested enterprises respectively, and speculate that this could trigger the involvement of MOC in approving FIPs.