Foreign firms and individuals will be allowed to set up limited partnership firms in China from March 2010, a move that could make it easier for some overseas investors to tap the domestic market.

But it remains unclear how far-reaching the rule change, announced on Tuesday, will be. The State Council said it would not apply fully to investment-oriented partnerships in China.

As for venture capital enterprises and private equity funds, we still lack necessary knowledge regarding whether there are big risks, what the risks are and whether strict rules must be adopted, the cabinet said in a statement explaining the new regulation.

Relevant sides still have different understandings, it said.

At present, foreign-invested private equity funds can be structured as limited partnerships through complex offshore platforms, but are required to be structured as corporations or unincorporated entities if investing onshore through yuan-denominated funds.

Only Chinese investors in onshore yuan funds can opt for the limited partnership structure, which offers tax advantages and caps liability.

Under the new regulation, foreign investors would be permitted to set up limited partnerships in China by themselves or with local partners.

The government added in its announcement that existing rules covering venture capital and private equity funds might still be applied.

Investors are required to contribute capital in the form of fully convertible currency or yuan.

Registration of these limited partnerships will take place at the local level and will not need approval from the Ministry of Commerce, it added.

(Reporting by Zhou Xin and Simon Rabinovitch; Editing by Jonathan Hopfner)

China Investment