BEIJING - China's fast growing private equity (PE) market has attracted global partners to use the Chinese currency in investments. This has heated up the competition between yuan-denominated and dollar funds in the world's second-largest economy.

The nation's strict foreign exchange control policies and the appreciation of the yuan are driving an increasing number of foreign PE firms to launch yuan-denominated funds jointly with local investors, in the search for higher returns.

Li Wanshou, president of Shenzhen Capital Group Co Ltd, said that the growth rate of yuan funds in China has exceeded that of dollar funds because the latter cannot be invested into pre-float financing and the central government still limits the conversion of foreign currencies in order to contain inflows of hot money.

"In China's fast growing capital market, there is much more demand for yuan funds than dollar funds," said Li.

Morgan Stanley and Hangzhou Industrial & Commercial Trust Co jointly launched a yuan-denominated fund to raise 1.5 billion yuan ($231 million) in mid-May. The foreign financial institution plans to set up more yuan funds in the coming years.

According to research by Zero2IPO Group, an integrated service provider in the China venture capital (VC) and PE industry, foreign PE firms launched seven yuan funds in the first quarter of this year, raising about $3.2 billion.

Before that, Goldman Sachs Group Inc signed an agreement with Beijing Municipal Government to launch a yuan-denominated fund of 5 billion yuan. Carlyle Group, The Blackstone Group LP and TPG Capital have also set up funds in yuan.

However, it will take five to 10 years for the yuan-denominated funds to meet the management standards of mature international VC and PE firms and compete with dollar funds in the global markets, analysts said.

Frank Tang, chief executive officer of Chinese PE firm FountainVest Partners, doesn't think there will be a slowdown in the expansion of China's PE market over the next five years. "The PE industry in China is not overheated. New opportunities may come from investments in small-scale enterprises," he said.

Tang also mentioned some industries that the PE firms in the future may be interested in, including consumer goods, new media and financial services.