China plans new rules to allow foreign companies to set up local units in the form of a locally registered partnership, in a landmark move to attract investment, a draft proposal seen by Reuters showed on Thursday.

The new rules are expected to mainly affect foreign investment, law and accounting firms. But foreign companies that want to form local partnerships must seek approval from China's Ministry of Commerce (MofCom), the document said.

Beijing has historically viewed private equity funds as speculators, though its attitude toward foreign investors has changed in recent years, partly as the government sought to maintain fast economic growth and create more jobs.

Of course, this is a very positive move by the government but I just feel it's not enough, said one long-time foreign institutional investor in China, adding restrictions remain for foreign-invested partnerships to invest in some sectors.

Many foreign investors have long complained about difficulties in making deals in China.

Last year, U.S. buyout giant Carlyle Group walked away from three years of negotiations to buy Xugong, China's top construction equipment maker, after running into bureaucratic obstacles.

For foreign invested partnership companies in China, some restrictions for dealmaking will remain.

It's interesting that foreigners cannot avoid the MofCom and NDRC approval processes (to make deals in China) by setting up through these foreign-invested partnerships, said Maurice Hoo, a Paul Hastings lawyer.

The National Development and Research Commission (NDRC) is China's top economic planner.


The MofCom, NDRC and other relevant government agencies have been studying and drafting the new rules for foreign-invested partnerships in China for more than a year.

The document seen by Reuters on Thursday is a copy of the final draft, which some lawyers and financial industry sources said would be issued by Beijing soon.

Foreign investment firms can now only register in China as a representative office of its parent company or as an advisory service provider, rather than as a partnership company.

The rules offer a new path for foreign investment in China.

One benefit of the new rules is that foreign private equity firms can more easily raise local yuan funds to invest in Chinese enterprises in the name of its local partnership, lawyers said.

But some private equity firms briefed on the new rules were disappointed that foreign partnerships still require approval from the Chinese authorities, said industry sources, who declined to be identified due to the sensitive nature of the matter.

It requires approval from the commerce ministry and its local branch offices, so it's more restrictive than forming local partnerships, said Paul Hasting's Hoo.

Currently, Chinese companies and Chinese nationals who want to set up a partnership, need only submit tax and commercial registrations at the local government level, which can often be completed in a matter of weeks.

(Editing by Jacqueline Wong and Ian Geoghegan)