China regulators in private equity crackdown

Industry watchdogs make dramatic swoop on irregular, poorly run and underdeveloped firms

Dual efforts by the China Securities Regulatory Commission (CSRC) and the Asset Management Association of China (AMAC) have led to a wide-ranging and aggressive crackdown on domestic private equity (PE) firms.

On 19 August, CSRC spokesman Zhang Xiaojun said that his organisation had finished inspecting 305 PE players in the first half of 2016, accounting for 2,462 individual funds, with total assets under management of ¥900bn ($135.6bn).

“The inspection focused on five areas,” he explained, “including financing, asset safety, information disclosure, leverage and the extent to which investors’ interest are harmed.”

He noted: “We found many irregularities. Four institutions are suspected of illegal financing activities and six firms may have damaged investors’ interests.”

A further 65 entities in the field, Xiaojun stressed, failed to disclose information as stipulated in regulations.

“All of the institutions with irregularities,” he warned, “will be further investigated by public security departments and related local securities regulators.”

Xiaojun also revealed that the CSRC is putting a moratorium on its examination and approval of structured funds: products that blend equities and fixed-income securities with the aim safeguarding investors’ capital while encouraging it to appreciate.

“The product design and trading mechanism of structured funds are too complicated for most investors,” Xiaojun added, “and some problems happened last year, so the CSRC will suspend its examination and approval until it perfects related regulations.”

Meanwhile – and far more significantly, in terms of pure numbers – the AMAC announced in the same month that it had revoked the licences of 10,000 fund-management firms since February, eliminating around 40% of the market.

In a statement, the regulator noted that the private wealth management sector “has developed quickly in China in recent years… But the companies’ qualities vary”.

The AMAC said it scrapped such a large number of licences because a “shell-company phenomenon” has “disturbed industry order and affected the truthfulness and effectiveness in monitoring the sector”.

Some companies, the organisation said, have registered to work in the sector “without a true willingness” to develop their asset management business.

Furthermore, it added: “Some companies do not meet the basic operation standards, while [others] are running irrelevant businesses like peer-to-peer lending, private lending or even illegal businesses under the cover of private hedge fund firms.”

Following a rapid proliferation of such firms, the AMAC stressed, “the good and the bad are intermingled”.

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