Is Shanghai willing to loosen up

on tax and quotas to be China's equity center?

Shanghai should offer tax breaks and investment quotas if it wants to attract buyout firms away from Tianjin, Beijing and Hong Kong to become China's private equity center, firms including Bain Capital LLC and TPG Capital say.

Shanghai imposes tax rates of up to 35 percent on private equity and venture capital firms under limited partnership structures and charges 20 percent on capital gains earned by non-executive partners, according to new rules announced on August 14. In Hong Kong, capital gains are exempt from taxation and the corporate tax rate was cut to 16.5 percent in October.

“While Shanghai offers more investment opportunities, Hong Kong certainly has an advantage in tax and legal aspects,” Jonathan Zhu, a Hong Kong-based managing director at Bain, said at a seminar hosted by the Shanghai government. “It's also extremely difficult for private equity firms to raise money on the mainland.”

Foreign buyout firms such as Bain and TPG are seeking to tap China's 43.9 trillion yuan ($6.4 trillion) of deposits as well as acquisition opportunities to capitalize on economic growth that topped ten percent for ten straight quarters. With China's stock market off over 50 percent this year, many funds are seeking returns from alternative investments such as private equity.

Shanghai, home to the nation's largest stock exchange as well as markets in commodities, index futures and foreign exchanges, is playing catch up with Hong Kong to become a global financial center.

The eastern city also lags behind the capital Beijing, the country's political decision-making center, and the northern city of Tianjin, the first to allow buyout firms to set up in 2006, in developing a private equity industry.


Shanghai Needs Incentives
Fang Fenglei, a partner at Goldman Sachs Group in China who founded Hopu Investment Management in 2007, says Shanghai should lobby the central government for special quotas for foreign buyout firms, similar to the qualified foreign institutional investors program, also known as QFII, for stock investments.

Beijing-based Hopu Investment, which raised about $2.5 billion for its overseas fund, received more than $300 million from Goldman and $1 billion from Temasek, Singapore's state-owned investment company, people familiar with the plan said in April.

As part of an incentive plan, Shanghai's Pudong financial district plans to grant rebates of as much as 40 percent on personal income tax payments by senior executives of private equity firms based there, according to Yan Xu, deputy district director. It will also offer one-time cash bonuses of up to 200,000 yuan.

China is encouraging the creation of domestic private equity funds to challenge the dominance of foreign firms such as The Carlyle Group and TPG. The government has so far approved ten domestic buyout firms, Fang said.

Neil Shen, founder and managing partner of Sequoia Capital China, said he recently registered a fund in Tianjin.

Tianjin's Bohai Industry Fund was the first domestic, yuan-denominated private-equity fund set up in China. Its shareholders include Bank of China Group Investment, China Life Insurance and China's Social Security Fund.


Should Shanghai give more investment incentives, will it be able to catch up with Hong Kong?