Chinese regulator vows to crack down on private equity, venture capital funds

Beijing

CHINA'S securities regulator said it plans to rein in the country's private equity and venture capital funds, stop public offerings disguised as private placements and fight embezzlement of assets.

The China Securities Regulatory Commission (CSRC) will work to root out "fake" private equity funds that are actually sold to the general public instead of targeted investors, chairman Yi Huiman said in a speech to a fund industry association.

The CSRC will also crack down on money managers that illicitly take public deposits, offer loans or embezzle fund assets.

China's financial regulators have become more assertive in recent months, cracking down in areas from online lending and insurance to initial public offerings and margin financing.

Greater oversight of the private equity industry has already kicked off. China halted such funds from raising money to invest in residential property developments, people familiar with the decision said earlier this month.

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"Private equity funds must return to the defined role of being private and supporting innovation and startups," Mr Yi said in the speech published on the CSRC website.

The regulator will impose targeted policies, support genuine private funds and "resolutely eliminate fake ones to promote an orderly market order and industry ecosystem".

The CSRC has been cracking down on irregularities among private funds - which cover private equity and venture capital funds as well as the Chinese equivalent of hedge funds - with annual inspections of hundreds of players between 2016 and 2019.

The watchdog's focus has been on issues including compliance, liquidity risks and illegal fundraising. In the 2019 probe of 497 private funds, regulators found malpractices such as borrowing new money to repay existing investors, raising money from disqualified investors and promising guaranteed returns.

Regulators have in the meantime encouraged the development of private equity funds as a channel of direct financing to support the economy.

In a speech in December, Mr Yi said that the government will help such funds broaden fundraising channels, and encouraged them to invest in early-stage small firms, particularly those in technology.

The number of registered fund managers has exploded in the past several years, with "false" private equity expanding alongside "true" private equity, damaging the industry, Mr 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, though global funds including Sequoia Capital and IDG Capital have also been active, with some raising funds on the mainland.

Hong Kong-based Hillhouse Capital Management has grown into a US$100 billion behemoth, making prescient bets on stocks, venture capital and private equity deals across Asia and particularly in China.

Investors have been bombarded this year by a sweeping crackdown from Chinese regulators that has targeted a growing list of companies including technology giants Ant Group and Tencent Holdings, after-school tutoring firms and ride-hailing platform Didi Global.

The moves are part of a broader push for "common prosperity" by President Xi Jinping that has ratcheted up in recent months.

Meanwhile, financial regulators have renewed a campaign to curb credit growth and restrain leverage in the real estate sector to ensure financial stability.

At the end of July, China's private equity and venture capital funds managed a total 12.6 trillion yuan (S$2.6 trillion), tripling from the end of 2016 and becoming the world's second-largest. BLOOMBERG