(Update with Stepstone’s comment in the fourth paragraph.)

Dec. 28 (Bloomberg) -- China will allow foreign private- equity fund managers convert money raised overseas into yuan and directly invest in the country under a pilot program in Shanghai, the Shanghai Securities News reported today.

The initiative is known as the Qualified Foreign Limited Partner program, the newspaper said. China also has a quota- based system that allows foreign funds to invest in the mainland’s stock markets.

Shanghai received an “in principle” regulatory approval for investments under the new plan where fund managers can now apply for their foreign currencies to be converted to yuan and invest directly in Chinese companies, according to the report, which cited an unnamed person close to the Shanghai government.

“This is a major step forward for foreign private fund managers to operate in China,” Monte Brem, chief executive officer of Stepstone Group, a San Diego-based fund of funds that manages $30 billion globally, said in Beijing. “Foreign funds will still face the so-called national status barrier for actual investments,” he said, referring to the need for approvals from other government departments and ministries.

State Administration of Foreign Exchange, the nation’s currency regulator, didn’t immediately respond to a faxed query that its press office requested.

Blackstone, Carlyle

Blackstone Group LP and Carlyle Group are among foreign firms that have raised funds in the Chinese currency to compete with local rivals. Private-equity funds raised a combined $1.9 billion for yuan funds last quarter, according to Beijing-based Zero2IPO.

China considered allowing foreign investment in yuan- denominated private equity and venture capital funds to help boost local industry. In March, a state council rule simplified the approval process and made it easier for overseas private- equity firms to set up foreign-invested partnerships.

“Many foreign private-equity houses have announced plans to set up local private-equity fund management entities or local yuan funds in the form of Chinese limited partnership this year, but actual investments of such funds haven’t been smoothly carried out due to many reasons including the currency conversion issue,” Yang Tiecheng, a Beijing-based partner at Clifford Chance, which specializes in finance, regulatory and investment funds, said by phone today. “The QFLP scheme was designed to solve that problem.”

Under current regulations, overseas private-equity funds can’t convert foreign capital invested in a partnership for local investment because of China’s capital controls.

--Eva Woo. Editors: Philip Lagerkranser, Linus Chua

To contact the reporters on this story: Eva Woo in Hong Kong at Ewoo9@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net