China supports local private equity funds to boost mergers and acquisitions as it strives to improve its economic structure, Su Ning, deputy governor of the People's Bank of China, said on Saturday in Shanghai.

China will improve the financing channels for M&A activities, including commercial bank loans and PE funds, Su said at a forum.

"China's healthy economic growth can't be made without private investment. The upgrading of the economic structure, which can be made through industry consolidation, needs the support of the financial sector," Su said.

Banks in China have signed agreements for M&A loans worth more than 13 billion yuan (US$1.9 billion) by the end of May since such loans were allowed in December, Su said.

The PE funds are active participants in the M&A business. China's fledging PE sector is growing rapidly but still lags the level in overseas markets, he said.

The National Development and Reform Commission, China's top economic planning body, has submitted a draft of rules governing local-currency PE funds to the State Council, China's Cabinet, earlier media reports said.

China wants a PE industry which can encourage talented Chinese PE professionals to manage money on behalf of local investors rather than managing money only for overseas funds.

Several yuan-backed PE funds have been set up in China, mostly on trial.

Shanghai, with its ambition to be a global financial hub, is playing catch-up with Tianjin, Beijing and Hong Kong to become a PE center by proposing tax breaks to attract buyout firms.

Shanghai is also studying the participation of commercial banks in the sector.

Earlier this month, the Blackstone Group said it will set up a 5 billion yuan PE fund with Pudong New Area's government in Shanghai, the first venture between a global buyout firm and a Chinese mainland city.

More overseas PE firms are expected to set up their yuan-denominated funds in Pudong, including CLSA and First Eastern Financial Investment Group.

(Shanghai Daily August 24, 2009)