* Memorandum of understanding signed with local government
* Fund will prioritize Shanghai and neighboring areas
* Blackstone to establish wholly-owned China subsidiary
* Blackstone shares down 3 pct (Adds background about China private equity, Blackstone)
HONG KONG, Aug 14 (Reuters) - Private equity firm
Blackstone Group LP
The fund is the first local currency yuan fund to be launched by Blackstone and will mean the establishment of a wholly-owned China subsidiary for the giant private equity company.
Besides Blackstone, foreign early birds for such a move have included U.S. venture capital firm Sequoia Capital, which last year raised about 1 billion yuan for its first yuan-denominated venture capital fund to focus on small China deals.
Reuters first reported the Blackstone local currency fund plans in June.
Blackstone signed a memorandum of understanding with the Shanghai local government on the fund's creation during a signing ceremony on Friday.
The fund will give priority to investments in Shanghai and neighboring areas, according to the statement.
Blackstone's Greater China Chairman Anthony Leung, a former Hong Kong financial secretary, said in November the group would not slow its investments in China despite the global financial crisis, as high economic growth and low valuations promised good returns. [ID:nSHA265898]
China has at times been at odds with global private equity firms, thwarting moves by foreign investors that have vied for stakes in industries deemed to be strategically sensitive.
But Beijing has pledged since late last year to develop yuan-denominated funds, often run by domestic managers, to reduce companies' dependence on bank financing amid the worsening global credit crunch.
CHINA TIES
Blackstone also has ties to China through the sovereign wealth fund China Investment Corp.
CIC, created to manage part of China's foreign exchange reserves for higher returns, in July completed an investment of about $500 million into a Blackstone hedge fund unit, a source familiar with the matter said at the time.
CIC is also an investor in Blackstone itself. It bought its original 9.9 percent stake in Blackstone just before the company's $31-a-share initial public offering in June 2007, and in October struck a deal allowing it to increase its ownership to up to 12.5 percent.
Blackstone's shares were 45 cents lower at $13.96 in early trading on Friday. (Reporting by George Chen in Hong Kong and Megan Davies in New York, editing by Gerald E. McCormick)