The China model: Copy, paste, improve

Five years ago, the private funds industry in China was a mess. A booming economy made it easy for wannabe GPs to deliver false promises of high returns with relatively short lock-up periods. The pitching of funds to retail investors, sometimes via text message, was a real source of concern (and mockery). Worse still, the Chinese government was frustratingly unclear about who exactly should be responsible for supervising this rapidly growing community, leading to a fragmented approach whereby local financial zones like Shanghai, Beijing and Tianjin ended up going it alone.

But these days – as we were reminded last week – China is now taking the private funds asset class very seriously; indeed, it's keen to do all it can to nourish the industry. The China Securities and Regulatory Commission (CSRC), now clearly the regulator in charge, said local GPs raising yuan-denominated vehicles could go about their business so long as they targeted sophisticated investors, made all the right disclosures and avoided the public airwaves when marketing.

It's a model that's noticeably similar to regulations built in the West. And ultimately the new rules should do a lot to stamp out fraudulent fundraising activity, which will help reputable GPs whose image has been tarnished by less disciplined managers.

However, unlike the West, you won’t hear China-based GPs complaining about (for example) having to safe-keep fund documents at a bank (even though not much harm could arise if they were lost). And don’t expect an overhaul on the scale of AIFMD – leaving the industry in a haze of confusion for five years and counting – anytime soon.

In fact, in building a regulatory framework, China seems to have done a pretty good job of taking all the good bits of other countries' frameworks, while avoiding the bad bits.

And the extent of China's progress – in a pretty short time span – is not entirely surprising. In recent years, Chinese officials have been quietly observing how the US and EU have gone about bringing GPs under their supervision post-crisis. During this period, industry sources have been consulted about how the new regimes were faring, with a view to helping the regulator understand what worked and what didn't.

“It’s actually quite amazing to know that Chinese regulators have asked much more pointed questions about how to supervise the industry than the SEC or European regulators,” says one globally-focused industry lawyer, who was among those consulted by the CSRC.

Say what you like about China being a 'copycat' culture; in the last decade, it’s done a good job of replicating Western practices and technology and, where possible, improving them. By the looks of it, it seems to be doing the same thing around private fund regulation.