Is It "SAFE" Again To Make Private Equity Investments In China?

A major legal impediment to Chinese private equity investments appears to have been repealed, although it is not yet clear whether the new regulatory regime will in fact make it easier to actually implement such investments. Until early 2005 the use of offshore holding companies in a tax efficient jurisdiction (such as the Cayman Islands) to structure private equity investments in China was a well established practice, with the Chinese founders themselves setting up such special purpose vehicles ("SPVs").

On January 24, 2005 and April 21, 2005, the State Administration of Foreign Exchange (SAFE), a Chinese government agency whose role had been traditionally limited to managing foreign exchange activities, issued the two rulings regarding mergers and acquisitions by foreign investors, better known as "Notice 11" and "Notice 29" respectively.¹