New Rules for China’s $3 Trillion Private Fund Industry Have More Teeth, Experts Say

12 Jul 2023

China is adding more teeth to regulations governing private funds, as the government aims to encourage healthy development of the 21 trillion yuan ($3 trillion) industry operating in a murkier part of the financial system than its publicly traded peers.

The new rules, which were signed by Premier Li Qiang earlier this month and made public on Sunday, provide an overarching legal framework for the industry that covers actors including fund managers and custodians. They will take effect Sept. 1.

While financial regulators have been stepping up oversight of the industry, most past regulations were released by regulatory agencies that didn’t carry the same legal weight as the new rules, which were approved and released by the State Council, China’s cabinet.

The new rules tighten requirements for private fund managers as well as their shareholders and actual controllers, and give regulatory agencies tougher measures to punish those that violate laws or regulations, Wang Shu, director of legal affairs at Beijing Redbud Capital Management Co. Ltd., wrote in an article published Monday. Redbud Capital operates venture capital (VC) funds.

Penalties for wrongdoing are far more severe under the new rules, though they also leave room for more flexible regulation of different types of private funds, according to lawyers at Tian Yuan Law Firm.

Private funds, such as private equity (PE) funds, are typically sold to institutions and wealthy individuals. Compared with mutual funds, which are sold to the public and subject to strict information disclosure requirements, private funds operate in a less transparent environment that increases the potential for fraud and other misconduct.

The private fund industry has played a positive role in serving the real economy, supporting innovation and meeting people’s needs for managing their wealth, the Ministry of Justice and the China Securities Regulatory Commission said in a Q&A about the new rules.

The rules, which have a chapter designated for VC funds, aim to encourage them to invest in early-stage, small companies and tech enterprises, the Q&A said. They also highlight support measures for fund-of-funds, VC funds and government-owned funds.

As of the end of May, there were 22,000 private fund managers in China managing 153,000 funds, according to the Q&A.