An employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

China Is Mulling Tougher Rules on Private Equity, Hedge Funds

(Bloomberg) -- China has drafted tougher rules for its 12.7 trillion yuan ($1.9 trillion) private fund industry, tightening scrutiny as the government reins in financial risks, according to people familiar with the matter.

The proposed new Asset Management Association of China rules would require hedge funds and venture capital funds to raise at least 10 million yuan before registering a product, ending the popular practice of starting with smaller amounts, the people said, declining to be identified because the draft hasn’t been publicized. Private equity and asset allocation funds would have to raise higher amounts under the plan.

The rules, which are still under discussion and could be revised, also cap investment in a single project at 20 percent of a fund’s assets and restrict co-investment by the management firm and its employees to no more than that percentage in any fund, the people said.

Tighter rules would add pressure on smaller players already struggling to raise money after China earlier revamped regulations and curbed money flows from banks. While the industry expanded rapidly in recent years, attracting global players from BlackRock Inc. to Bridgewater Associates LP, misbehavior including market manipulation triggered a government crackdown.

AMAC didn’t immediately reply to faxed questions. The China Securities Journal reported the draft rules earlier.

Range of Requirements

Private funds, which can only sell products to institutions and qualified individuals, include private securities funds -- the Chinese equivalent of hedge funds -- and private equity and venture capital funds.

Under the draft rules, the threshold for registering a product with AMAC, a precondition to launching a fund, is 10 million yuan for private securities funds and venture capital funds, according to the people. The levels for private equity funds and asset allocation funds -- a new category designed mostly for funds of funds -- are 30 million yuan and 50 million yuan respectively.

More than 2,000 of the private securities funds currently active manage less than 10 million yuan, according to Shenzhen PaiPaiWang Investment & Management Co., which tracks local hedge funds.

The private fund industry had 12.7 trillion yuan of assets as of Jan. 31 and nearly 25,000 management firms, according to AMAC, an industry body overseen by the nation’s securities regulator. Only 239 of the companies managed more than 10 billion yuan, while about 2,300 managed less than 100 million yuan.

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