By Stephen Aldred and Samuel Shen
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The source added that the Wall Street bank had signed an agreement with the Beijing municipal government, which will be its first investor in the domestic fund.
News of the fund, a joint venture between Goldman and state-owned Capital Opportunities and Management Center of Beijing, a unit of Beijing's municipal government, came on the same day that Morgan Stanley issued a statement announcing the launch next week of its own yuan private equity fund.
Morgan Stanley <MS.N> and its subsidiary, Morgan Stanley Huaxin Funds, will launch its fund in Hangzhou on May 18.
China is encouraging foreign private equity firms to set up and launch yuan funds, hoping to use their international expertise to improve local corporate governance and channel money into the private sector to aid the domestic economy.
Since 2009, international firms including Blackstone Group L.P. <BX.N>, TPG <TPG.UL> and Carlyle Group <CYL.UL> have announced plans to launch yuan funds in China through partnerships with local governments or Chinese companies.
Launching yuan funds allows foreign private equity firms to access deals more easily and face less regulatory scrutiny. At the same time, they can raise money from an increasing number of wealthy Chinese seeking high returns.
Previously, institutions such as Goldman and Carlyle invested in Chinese companies through offshore dollar-denominated funds. But investing and exits were often complicated by China's strict capital controls.
For example, Carlyle's planned acquisition of Xugong Group Construction Machinery Co, one of China's biggest machinery makers, was shot down by the government on concerns about foreign monopolies.
"The route to regulatory approval for all transactions is much simpler and faster," said the source, discussing the advantage of yuan funds over dollar funds.
Goldman declined to comment.
The source declined to be named because the matter has not been disclosed publicly. ($1 = 6.492 yuan)
(Reporting by Stephen Aldred and Denny Thomas; Editing by David Chance and Ken Wills)