China to force out 2,000 private asset management companies
China’s regulators are tightening supervision over its 5 trillion yuan private fundraising industry as rising cases of fraud and defaults in the nation’s asset management sector threatens financial and social stability.
More than 2,000 private fundraising and management organisations, essentially asset management companies managing private investment trusts and functioning like hedge funds, will be forced out of the market after the Labour Day break, said the China Securities Regulatory Commission (CSRC) and the Asset Management Industry Association of China (Amac), a self-regulatory organisation under the CSRC, last week.
The authorities have not specified when the clean-up will be completed but the Amac had said in an earlier statement these companies could reclaim their qualifications after they meet the compliance requirements.
Meanwhile, the Amac has been strengthening registration requirements and held its first nationwide qualification exam for private investment funds practitioners late April. All fund managers and senior managers of fund companies will have to pass the exam this year or will be barred from raising money for private funds from next year.
Song Qinghui, a prominent economist based in Beijing, said fund regulators have initiated stringent measures to rein in emerging risks in a sector developing too quickly.
“However, compared to registration, the key problem of China’s private investment fund organisations lies in the fundraising process. The regulator should focus on this area and clarify the rules,” Song said, adding the CSRC relies too much on the Amac for regulation.
“The Amac is a self-disciplining organisation and lacks the authority to regulate industry players. The CSRC should take more responsibility in organising exams and fund qualification verification.”
Investment targets of these private fundraising organisations, generally known as private equity funds in China, include the stock, bond and property markets. The sector had been unregulated until June 2013, when China’s new fund law was first implemented.
The national qualification exam for private investment fund practitioners has been focusing on the secondary securities market, leaving some practitioners, including those engaging in venture capital and private equity investment areas, confused.
China Venture Capital and Private Equity Association (CVCPEA), an industry association for venture capitalist and private equity investors under the National Development and Reform Commission (NDRC) even made a public petition ahead of the exam for its cancellation.
A former CSRC official who did not want to be identified, said the move by CVCPEA highlighted the awkward regulatory difficulties of China’s private investment funds.
“The market has been under the supervision of both the NDRC and the CSRC for years through the two industry associations until 2013, when the latter officially became a formal supervisor, according to a decision by the party’s institution organisation commission,” he said. “Technically the Amac is not the body most familiar with private equity or venture capital businesses.”
At a press conference on Friday, Hong Lei, chairman of the Amac, said the association will make the exams – due later this year – more suitable for private equity and venture capital industries.
The private fundraising industry in China has developed rapidly in the past two years. Currently, around 25,800 registered organisations manage assets worth 5 trillion yuan, show official figures. But illegal fundraising cases have been surfacing since last year, with many cases of fraud under the cover of private investment fund management.
Chen Ziqiang, director of the CSRC private equity funds supervision department, on Friday said: “Many big cities and provinces in China have been reporting illegal fundraising by private equity funds since 2014. A total of 32 registered fund management companies and over 10,000 investors have been involved in the cases.
“Also, some private equity funds have been promising high returns in the past few years when raising funds but defaulted and even ran away when they realised they can’t keep those promises.”
He said that to cleanse the market, the CSRC will improve industry regulations and join hands with the Amac to improve self-regulation.
Rogue market players have taken advantage of the e-financing boom as regulation in the area struggles to catch up. Police data show the annual number of illegal fundraising cases has jumped to more than 10,000 from 2,000-3,000 in previous years. In just the first quarter of this year, over 2,300 cases were filed, with a lot more cases involving over 100 million yuan.
Ezubao, once China’s biggest peer-to-peer online lending firm, collected more than 58.2 billion yuan from over 900,000 investors in less than two years but 95 per cent of its lending programmes were found to be fake last year.