Authorities clash over control of PE funds

Rival mainland finance watchdogs disagree over which rules are governing private-equity sector

PUBLISHED : Monday, 01 April, 2013, 12:00am
UPDATED : Monday, 01 April, 2013, 4:04am


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A tug of war has erupted between the mainland's securities regulator and top economic planning agency for control over the private-equity sector.

In a circular that raised eyebrows among China-watchers following the mainland's recent cabinet reshuffle, the National Development and Reform Commission (NDRC) reiterated previous rulings that private equity funds would be barred from selling mutual funds.

The statement was seen as a confrontational engagement with the China Securities Regulatory Commission (CSRC), which conducted a major liberalisation of market regulations in February to bolster institutional buying on the volatile stock market. Among the reforms was granting private-equity groups access to the mutual fund sector.

The conflict between the two ministry-level authorities comes as an embarrassment to newly elected Premier Li Keqiang, who has pledged to streamline government to create a business-friendly regulatory environment.

In a move it said was aimed at stabilising the roller-coaster stock market, the securities regulator planned to allow about 50 non-mutual fund institutions including banks, brokerages and private-equity groups to manage funds slated for stock investments. The plan was hailed as a savvy policy since its announcement injected vigour into the mutual fund sector, which has suffered a huge brain drain in past years as star fund managers were attracted by hedge funds' better pay and perks.

However, the NDRC, authorised to manage the private-equity industry since 2005, appears determined to maintain a tight grip over private-equity funds despite what is seen by critics as inefficient control.

"The [NDRC's] control over the sector didn't prove efficient," said Z-Ben Advisors' chief researcher, Howhow Zhang. "It will be just a matter of time before it is forced to relinquish its authority on the industry."

Under existing rules, mainland private-equity funds with total assets exceeding 500 million yuan (HK$618 million) each must be registered with the NDRC. However, only 36 of several thousand funds are currently registered, and unregistered funds are operating freely. According to fund managers, the only drawback for sidestepping the NDRC approval procedure was that they wouldn't be allowed to manage assets for the national pension fund.

The NDRC's circular last week further reflected a maze of contradictions and wrangling among government bodies with different vested interests.

In 2007, the State Administration of Foreign Exchange unilaterally unveiled the so-called through-train scheme that allowed mainland residents to directly buy Hong Kong-listed shares. But the policy never took effect amid obstructions from the CSRC, which was battered by worries over a capital outflow from the A-share market.

Zhang Weiying, economics professor at Peking University, recently criticised the NDRC for failing in its responsibility for reform. As a result it is locked in a power struggle with the CSRC for control over private-equity funds, leaving cash-rich investors and fund managers to play a guessing game about whose policies they should abide by.