Shenzhen Elevates QFLP Pilot to Attract More Foreign Onshore Fund Investments

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Shenzhen has introduced new regulations to enhance and simplify its Qualified Foreign Limited Partner (QFLP) pilot program, allowing approved international investment institutions to convert foreign currencies into Chinese yuan and invest in domestic funds. The goal is to encourage more foreign participation in establishing onshore private equity funds.

The updated guidelines expand the use of the quota-based QFLP management model and enable eligible fund managers to establish private equity funds that include overseas partners, raise capital privately, and invest within China, according to the municipal government’s recent announcement.

Previously, Shenzhen’s QFLP framework required foreign partners to fundraise abroad before applying for a pilot quota. Only after securing the quota could they form a pilot fund to invest domestically.

“One of the noteworthy changes with these new rules is the aggressive promotion of the quota-based QFLP management approach,” an observer of Shenzhen’s financial development noted.

This model allows fund managers to create one or more pilot QFLP funds within the total quota, with the flexibility to adjust each fund’s size. This significantly enhances capital mobility. By adopting this broader implementation, Shenzhen is adopting a more proactive stance to attract foreign investment.

This approach has notably lowered the costs associated with cross-border investments and increased Shenzhen’s appeal to foreign capital. Thanks to its proximity to Hong Kong and the strategic policies of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen is strengthening its financial links with Hong Kong, creating unique opportunities to draw in Hong Kong and international investors.

Another key element of the new regulations involves pushing further into onshore QFLP investments, according to industry experts.

Initially, establishing each QFLP fund and making investments required multiple approvals. However, the city has since simplified the process.

In March, the Municipal Financial Committee’s Office of the Shenzhen Office announced new measures supporting the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. These measures broaden the range of investments under the pilot program and allow more flexible project allocation and switching within the quota system. The latest rules extend these eased procedures across the entire city.

The QFLP program was first tested in Shanghai 15 years ago and has since expanded to over 50 cities nationwide. Despite this growth, industry insiders believe there is still room for further improvements.

Major challenges include the absence of a unified national framework, policy implementation uncertainties, reforms affecting cross-border direct investments that have diminished some benefits of the QFLP, and inefficient foreign-exchange remittance procedures, said Fang Jian, managing director and general counsel of Warburg Pincus, at a recent financial forum.