New rules force closure of about 10,000 Chinese private wealth management firms in six months

About 10,000 private wealth management firms have been shut down in China since early February, after it tightened entry norms for firms in a bid to check the rising defaults and fraud in the insufficiently regulated sector.

Private wealth management firms, called “private fund raising companies” in China, are essentially asset managers supervising the funds raised from the general public. Their investment targets include the stock, bond and property markets.

“This (private wealth management) sector has developed quickly in China in recent years…But the companies’ qualities vary… ” the Asset Management Association of China (AMAC) said in a statement yesterday. AMAC is the self-regulatory association of fund management companies in China.

“Some companies have registered with the association without a true willingness to develop their asset management business. Some companies do not meet the basic operation standards, while some companies are running irrelevant businesses like peer to peer lending, private lending, or even illegal businesses under the cover of private hedge fund firms,” the statement said.

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The AMAC issued a set of rules on February 5, requiring companies in the sector to submit legal opinion documents, and records of the products they have issued.

The AMAC said it had cancelled the registration of more than 10,000 private wealth management companies in two batches by yesterday.

“Currently, more than 16,000 firms are registered as managers for privately raised funds…and more than 40,000 products are on our records. These products have raised more than 6.5 trillion yuan (HK$7.59 trillion),” AMAC said.

Yin Jun, who runs a private hedge fund company in Shanghai said regulations had been “tightened up” this year.

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“In addition to stricter requirements for legal and auditing filings, we now have to give customers a 24-hour calm period to terminate the contract, and senior managers need to pass examinations held by AMAC,” he said.

According to the rules, all fund managers and senior managers of these private hedge fund companies will have to pass the exam this year or they will be barred from raising money for private funds from next year.

The sector had been vastly unregulated until June 2013, when China’s new fund law was first implemented.

By February this year, the sector had around 25,800 registered organisations managing assets worth 5 trillion yuan, according to official figures. However, illegal fundraising cases were also increasing since last year, with many cases of fraud under the cover of private investment fund management.

In early April, Zhongjin Asset Management, a privately-owned asset management company collapsed, leaving unpaid debts of about 5.2 billion yuan to 25,000 investors.