(Yicai) Dec. 25 -- Shenzhen has rolled out new rules to broaden and streamline its Qualified Foreign Limited Partner pilot program, which allows approved overseas investment institutions to convert foreign currencies into Chinese yuan and invest in domestic funds, with the aim of making it easier for international investors to take part in setting up onshore private equity funds.

The new rules expand the use of the quota-based QFLP management model and support eligible fund managers to launch private equity funds that include overseas partners, raise money privately and invest within China, according to regulations released by the Chinese special economic zone’s municipal government on Dec. 23.

In the past, Shenzhen’s QFLP mechanism required foreign partners to raise funds overseas before they could apply for a pilot quota, and only after that could they set up a pilot fund to invest in domestic projects.

“One of the highlights of the new regulations is the strong push to roll out the quota-based QFLP management model,” a long-time observer of Shenzhen’s financial reforms told Yicai.

Under this system, eligible fund managers can set up one or more pilot QFLP funds within the overall quota and flexibly adjust the scale of each fund, the person said. This greatly increases how freely capital can be used. By promoting the wider rollout of this model, Shenzhen is taking a more proactive stance.

This arrangement has substantially reduced the institutional costs of cross-border investment and made Shenzhen more attractive to foreign capital, he said. With its proximity to Hong Kong and the policy advantages of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen is also strengthening its financial ties with Hong Kong, giving it unique advantages in attracting Hong Kong and international investors.

Another highlight of the new regulations is a renewed push to deepen the QFLP onshore investment pilot, industry insiders said.

Under the original framework, each time a QFLP fund was set up in Shenzhen and each time it made an investment, multiple layers of approval were required. The city later streamlined the process.

In March, the Office of the Financial Committee under the Municipal Party Committee of Shenzhen introduced new measures supporting the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, allowing a broader range of investments under the pilot mechanism, and more flexible allocation and switching of projects under the quota system. The latest regulations now extend these more relaxed arrangements across the entire city.

The QFLP system was first piloted in Shanghai 15 years ago and it has since expanded to over 50 cities nationwide. Even so, industry insiders say there is still room for improvement.

The main shortcomings of the QFLP system include the lack of a unified national-level framework, uncertainties in policy implementation, reforms to cross-border direct investment that have diluted some of the QFLP’s original advantages, and inefficient foreign-exchange remittance processes, Fang Jian, managing director and general counsel of Warburg Pincus, said at a recent Lujiazui Financial Salon.

Editor: Kim Taylor