China has at last offered some clarity on which government office will regulate domestic private equity funds, dissolving the on-going dispute between two high-level regulators vying for the position.
In late June, the State Commission Office for Public Sector Reform of China (SCOPSR), a government body led by the State Council and the Chinese Communist Party, said that the China Securities Regulatory Commission (CSRC) would be responsible for the administration of private equity funds in the country, according to a report from Debevoise & Plimpton citing a Chinese language circular issued by SCOPSR.
Therefore, private equity funds will be required to register with the CSRC and the government body will determine who the funds are allowed to market to in China.
Within the CSRC they will eventually build out an organization that will handle private equity funds
Meanwhile, its rival institution, the National Development and Reform Commission (NSRC), will be responsible for the formulation of policies to promote the private equity industry, which includes issuing regulations on private equity investments from China’s government institutions.
The CSRC intends to create an internal unit to specialize in private equity regulations, according to Debevoise Hong Kong partner William Chou.
“What we understand, informally of course, is that within the CSRC they will eventually build out an organization that will handle private equity funds and within that enforce regulations that are to be developed with regards to private equity funds including their registration,” said Chou.
While the CSRC has expressed a serious interest in establishing itself as the private equity regulator in China for the past couple of years, the NDRC has offered itself as a competing candidate. After months of back and forth, the NDRC in March reasserted some of its authority over the industry by issuing fund registration rules that bar GPs from investing in public securities – including bonds, shares, and mutual funds – which conflicted with guidance that was circulated the previous month by the CSRC.
“[CSRC’s] interest in it and the NDRC’s interest in it has been bubbling to the surface and I think it is fair to say that there had to be a decision made as to who would be the lead on this,” Debevoise partner Andrew Ostrognai said. He adds that the announcement comes from “extraordinarily on high” within the Chinese government so can likely be taken as an official decision.
Industry sources tend to agree that the most suitable regulator for private equity is the CSRC. One China-focused lawyer said, “The CSRC really is a securities regulator as people would think of [one] in other markets. The NDRC is really more of a government economic planning body and their focus is a little different. They’re looking more at the macro factors and how does [private equity] fit in, so they’re more of a planning council, where the CSRC [deals with] the nuts and bolts of getting forms filed and how [the government] is regulating you.”
Clifford Chance partner Ying White agreed, telling PE Manager earlier, “The NDRC doesn’t seem to have a lot of capacity to regulate the private equity and venture capital industry, so supervision and
The NDRC doesn't seem to have a lot of capacity to regulate the private equity and venture capital industry, so supervision and regulation has been very light compared to the US and Europe
regulation has been very light compared to the US and Europe.”
However, when the CSRC will officially begin or how burdensome its requirements will be remain unclear, according to Ostrognai.
“I think we have to wait and see what regulations come in. Certainly there will be things that people have not been required to do before that they will be required to do now such as making a filing giving basic information about your fund – that isn’t a CSRC requirement now but the NDRC does now require it.”
One industry source believes however that despite remaining uncertainties, it is “good news” for institutionalized GPs as funds that have previously marketed to the general public and lost money have tainted the reputation of private equity firms.
He said, “There have been abuses in the past. To have somebody reigning it in and being a source of redress saying you can’t be selling these funds to the retail market – that is probably only a good thing for the major funds [as it] brings some integrity to the structure and people can take [private equity] seriously.”