(Bloomberg) — The Chinese securities regulator said it plans to curb the country’s private equity and venture capital funds, stop public offerings disguised as private placements and fight asset misappropriation.
The China Securities Regulatory Commission will work to eradicate “fake” private equity funds that are actually sold to the general public rather than targeted investors, Chairman Yi Huiman said in a speech to a fund industry association. The CSRC will also crack down on money managers who illegally take public deposits, offer loans or embezzle fund assets.
China’s financial regulators have become more assertive in recent months, cracking down on areas from online lending and insurance to IPOs and margin financing. Greater supervision of the private equity sector has already begun. China stopped raising money for such funds to invest in housing projects, people familiar with the decision said earlier this month.
“Private equity funds should return to the defined role of being private and supporting innovation and startups,” Yi said in the speech published on the CSRC website. The regulator will impose targeted policies, support genuine private funds and “resolutely eliminate counterfeit goods to promote an orderly market order and industrial ecosystem.”
The CSRC has addressed irregularities among private funds — including private equity and venture capital funds and the Chinese equivalent of hedge funds — with annual inspections of hundreds of players between 2016 and 2019.
The watchdog’s focus was on issues such as compliance, liquidity risks and illegal fundraising. In the 2019 probe of 497 private funds, regulators found malpractice such as borrowing new money to pay back existing investors, raising money from disqualified investors and promising guaranteed returns.
Regulators, meanwhile, have encouraged the development of private equity funds as a direct financing channel to support the economy. In a December speech, Yi said the government will help such funds broaden fundraising channels, encouraging them to invest in small business start-ups, especially those in technology.
The number of registered fund managers has exploded in recent years, with “false” private equity proliferating alongside “real” private equity, wreaking havoc on the industry, Yi said in his recent speech. The CSRC will strictly regulate fundraising, investment, management and withdrawal of funds within the sector, he said, without providing a timetable for new rules.
China’s private equity and venture capital market is dominated by local names, although global funds including Sequoia Capital and IDG Capital have also been active, with some fundraising in the mainland. Hong Kong-based Hillhouse Capital Management Ltd. has grown into a $100 billion behemoth making farsighted betting on equities, venture capital and private equity transactions in Asia and particularly China.
Investors have been bombarded this year by a crackdown by Chinese regulators targeting a growing list of companies, including tech giants Ant Group Co. and Tencent Holdings Ltd., after-school tutoring companies and the ride-hailing platform Didi Global Inc. are part of a wider push for “common prosperity” by President Xi Jinping that has increased in recent months.
Meanwhile, financial regulators have renewed a campaign to curb credit growth and limit leverage in the real estate sector to ensure financial stability.
At the end of July, Chinese private equity and venture capital funds managed a total of 12.6 trillion yuan ($1.95 trillion), tripling from the end of 2016 and becoming the second largest in the world. The country’s mutual funds sold to the public have been worth 23.5 trillion yuan, the CSRC said.
(Updates with more on regulatory oversight from the fifth paragraph)
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