By Raphael Minder in Hong Kong

Fundraising for private equity in China bucked the overall trend in Asia by more than doubling in the first half, at a time when private equity managers are struggling to put their Chinese money to work, figures on Tuesday revealed.

Private equity firms raised $5.26bn to invest in China, a 239 per cent increase from the first half of 2006, according to data from the Asian Venture Capital Journal. Meanwhile, fundraising for Asia as a whole fell 5.7 per cent to $15.8bn.

In contrast to the surge in fundraising, private equity investments in China fell 25.3 per cent to $4.4bn, with investors facing tougher regulations, greater political sensitivities and rising price tags as a flow of successful initial public offerings continues to hike valuations there.

Tuesday’s findings follow a PwC report earlier this month showing a 35 per cent drop in the first half in takeover transactions in China involving a foreign buyer.

John Gu, a principal at KPMG, said on Tuesday: “The Chinese government is still not comfortable about giving up control in certain strategic areas to private equity funds, in particular the buy-out funds.”

Meanwhile, China is flexing its muscles abroad, as demonstrated this week by China Development Bank’s unexpected decision to make the country’s biggest acquisition overseas by buying a stake in Barclays, the British bank trying to buy ABN Amro.

So far this year, cross-border outbound M&A transactions from China have already reached a combined $16.3bn, compared with $15.3bn last year and $9.1bn in 2005, separate data on Tuesday from Thomson Financial showed.

Gaby Abdelnour, who heads JPMorgan in the Asia-Pacific region, said: “People may or may not recognise it but China is a financial powerhouse. Because of the currency situation, they have more interest in making investments overseas now than allowing people to come into China.”

Jamie Paton, managing director in Asia for 3i, the private equity firm, said Tuesday that a Chinese reaction to the emergence of private equity was “inevitable”. But he argued that Beijing’s response was relatively restrained “if you look at what happened in Germany,” when two years ago a leading politician warned against private equity by comparing such investors with locusts.

Mr Paton suggested private equity firms needed to respond to the new context in China, where domestic players such as CDH are also gaining clout. He said: “It sends the message that we have to be local and we have to be on the ground. The industry has to get off its backside to promote all the good things that we are doing. The fundamentals are changing.”

Carlyle, the US buy-out firm, has spent 18 months trying to secure regulatory backing to invest in Xugong, the mainland’s largest construction machinery maker, in the face of political opposition. It has also been locked out of investments in two state-owned banks, Guangdong Development Bank and Chongqing City Commercial Bank.

Copyright Fund China 2008.

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