By Sundeep Tucker in Hong Kong 2010-03-22

UBS is in talks with the Beijing municipal government on setting up a renminbi-denominated private equity fund as the Swiss bank looks to expand in China.

Financial groups are flocking to set up local currency funds in China because of the stricter regulatory hurdles that surround investments made in foreign currency.

The Beijing municipal government is looking at ways of deepening its involvement in private equity and has announced plans to establish an investment fund with Carlyle Group of the US.

The municipal government’s talks with UBS are at a “preliminary” stage, with no decisions made over structure, size or personnel, according to people familiar with the matter.

UBS declined to comment.

While there are a number of hurdles to negotiate, if successful it would be the first fund of its kind involving a global investment bank and a Chinese municipal body.

“The discussion is over how this fund is run and who puts what money in,” one person familiar with the matter said.

UBS has spent the past two years on the defensive after posting record losses and suffering big outflows at its private bank.

However, it is hoping to deliver successive quarters of profitability throughout 2010.

UBS last year cut its net loss to SFr2.74bn ($2.6bn) from SFr21.29bn in 2008.

Oswald Grübel, UBS chief executive, told the Financial Times while on a tour of Asia last week that the bank would consider investment opportunities in China because of its “appealing” growth prospects.

In 2006, the Swiss acquired a 20 per cent stake and management control of Beijing Securities, in one of the few such deals to grant a foreign group an onshore securities licence.

It holds the biggest quota among overseas groups to invest in onshore stocks through China’s restricted foreign participation programme.

UBS is a leading adviser to mainland initial public offerings.

Blackstone, the US private equity fund, has signed a memorandum of understanding with Shanghai’s financial district to launch a Rmb5bn ($730m) fund for investment in and around the city.

Foreign private equity groups are increasingly being challenged by aggressive domestic players that have sprung up with the encouragement of the Chinese government.