The Chinese government is now piloting the Qualified Foreign Limited Partner and Qualified Domestic Limited Partner systems in Hainan Free Trade Port to facilitate market access and liquidity options for foreign individual and institutional investors as well as domestic investors.
Qualified Foreign Limited Partner and Qualified Domestic Limited Partner Systems
China will pilot qualified foreign limited partner (QFLP) and qualified domestic limited partner (QDLP) systems in Hainan province, which will be a significant breakthrough in terms of the existing foreign exchange control system in China.
- The QFLP system allows foreign individual and institutional investors to invest in Chinese assets through fund managers, while the QDLP gives foreign investment access to domestic investors.
- The QDLP system is currently available in Beijing and Shanghai, while the QFLP was first implemented on a trial basis in other cities including, but not limited to, Shanghai, Shenzhen, and Tianjin.
The first QFLP fund in Hainan
The QFLP system allows foreign investors to form an onshore RMB fund to invest in private Chinese companies. The foreign investor(s) need to first set up a foreign management entity onshore. Then after having set up the QFLP fund, it will be able to raise money from both domestic and international investors (the foreign currency is converted into RMB).
In September 2020, the first QFLP fund – BOCOM International Kechuang Shengxing QFLP Equity Investment Fund – was established in Haikou Jiangdong New Area, Hainan Province, by subsidiaries of the Chinese Bank of Communications, namely BOCOM International Holdings and BOCOM International Equity Investment Management. The new structure aims to support the development of innovative high-tech enterprises in the fields of finance, information technology, financial technology, high-end equipment, and more, with a capital equal to about USD 100 million.
Hainan is facilitating the formulation and promulgation of QFLP interim rules. Market watchers suspect that QFLP companies will have no minimum access threshold for registration, with foreign investors enjoying the same treatment as domestic investors, though the rules and clarity on this front are awaited. Meanwhile, the local bureau will apply for support from the State Administration of Foreign Exchange to publish the pilot rules for QDLPs within this year.