Do SOEs serving as GPs comply with regulations in China?

As private equity funds are booming, state-owned enterprises (SOEs) become increasingly involved in these funds. Arrangements where SOEs serve as general partners (GPs) of partnership funds are not uncommon. However, it seems that these arrangements are not lawful, because Article 3 of the Partnership Law prohibits solely state-owned enterprises (SSOEs) and SOEs from acting as general partners.

The aforesaid conflict between legislation and practice gives rise to two questions: what are SSOEs and SOEs? Can SSOEs and SOEs serve as GPs?

What are SSOEs and SOEs? The latest legal definition of SOEs is provided in the Administrative Measures for the Regulation over Trading of State-owned Assets by Enterprises dated 24 June 2016, also known as “Decree No. 32.” According to the principle of new laws taking precedence over old laws, it is understood that Decree No. 32 shall prevail as far as the definition of SOEs is concerned.

Pursuant to Article 4 of Decree No. 32, SOEs include SSOEs, wholly state-funded enterprises (WSFEs), state-controlled enterprises and enterprises under actual control of the state. Their definitions are as follows:

1. SSOE: an enterprise (company) whose equity is 100% held by a government authority or agency or public institution;

2. WSFE: an enterprise with 100% equity directly or indirectly held by one
or more government authorities or agencies, public institutions and/or SSOEs;

3. State-controlled enterprise: an enterprise with over 50% equity held by one or more government authorities or agencies, public institutions, SSOEs and/or WSFEs, one of which is the largest shareholder of the enterprise; or (2) a subsidiary (at any level) of, and with more than 50% equity held by, a SSOE, WSFE or state-controlled enterprise;

4. Enterprise under actual control of the state: an enterprise with less than 50% equity directly or indirectly held by a government authority or agency, public institution, SSOE, WSFE or state-controlled enterprise, which as the largest shareholder of the enterprise is able to exercise control or direction over the enterprise through contractual arrangement or any other means.