Shanghai has launched a pilot scheme allowing qualified foreign institutions to make private equity investment in China, marking an important step in the liberalization of China's capital markets.

Select overseas investors can convert foreign currencies into yuan for private equity investment in China, the Shanghai government said in a statement on its website.

The scheme is dubbed QFLP -- Qualified Foreign Limited Partner -- modeled after China's Qualified Foreign Institutional Investor (QFII) programme, which allows foreign investors to buy Chinese stocks and bonds.

The pilot scheme would help attract quality, long-term overseas capital, boost domestic investment, and would promote the development of a local private equity market, according to the statement.

It would also help accelerate China's economic restructuring; and strengthen Shanghai's role as an international financial center.

Analysts said the move could also benefit in the long run global private equity firms such as TPG [TPG.UL], Carlyle Group [CYL.UL] and Blackstone Group (BX.N), which have been rushing to raise yuan-denominated funds in China.

According to the government statement, qualified overseas institutions including pension funds and endowment funds could apply to join the scheme.

China's foreign exchange regulator had granted Shanghai a $3 billion initial quota for the programme, sources with knowledge of the situation told Reuters in November.

China has relaxed rules to allow foreign private equity firms such as TPG and Carlyle to launch yuan funds as the government sought to channel more savings into the private sector to sustain growth.

Raising funds in yuan instead of in foreign currencies helps foreign private equity firms simplify legal structures and reduces regulatory hurdles to acquiring state-owned companies. ($1=6.66 Yuan)