China regulators may group PE with private funds

A draft law from the China Securities Regulatory Commission proposes to place private equity and private funds in similar regulatory categories.

The China Securities Regulatory Commission (CSRC) has been drafting regulations that could begin to regulate Chinese private equity firms more as if they were hedge funds – a move that Chinese firms have been opposing, according to Winnie Deng, analyst at Z-Ben Advisors.

The proposed law, the Securities and Investments Fund Law, is an attempt to simplify the categorisation of both private equity and private funds. In short, the CSRC is trying to categorise both as “securities” and put private equity under its oversight, which would put a lot more disclosure requirements on private equity funds in China.

“Private equity firms have enjoyed a lot of flexibility in the past,” Deng said, adding that it is considered a lightly regulated sector in China. Private equity firms therefore are opposed to the CSRC draft law.

Nothing has been finalised as of yet, Deng said. The first draft of the regulations that the CSRC put up for comment drew much opposition, and the second draft released in June didn’t go through, primarily because of the private equity question.

Another side to these regulations is the added pressure on Chinese private funds, which would be put in the same category as private equity under the new law. According to a recent Z-Ben study, 93 private funds have been forced into early liquidation so far in 2012, which is already double the 2011 figure of 45. Early liquidation occurs when a private fund underperforms to a certain pre-set level, Deng told PE Asia.

Overall private funds are some of the most unregulated entities in China’s finance sector, Deng said. By definition, they are simply non-public funds that have their own pool of capital, and are allowed to invest in anything. One of the primary reasons private funds have done so poorly in China this year, Deng said, is the performance of A shares in China, which many private funds buy into.

The new CSRC regulation, Deng said, will get private funds out of the “regulatory gray area”.

However, Chinese private equity firms are primarily opposed to the regulation that the new law will impose on them, and see their issues with the regulation as completely separate from those of the private funds, Deng said.

Among the general public in China, private equity and private funds are often confused due to the Chinese translation. The word for private equity in Chinese (si mù) translates into “privately raised fund”. In addition, the word is also used for mutual funds and pre-IPO funds.