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China introduces rules for private investment funds

Private funds
By Hui Ching-hoo   
July 13, 2023

China has unveiled rules for private investment funds, aimed at ensuring “healthy” growth of the industry and protecting investors, a move welcomed by market participants.

The rules contain 62 measures, including setting out obligations of private investment fund managers and custodians, and requirements for risk management practices.

Among other things, managers of private investment funds need to offer products that match the risk tolerance of their clients.

The government also ordered venture capital funds to support startups in innovative industries, in line with Beijing’s existing policy.

“In recent years, the country’s private investment fund sector has been growing steadily. It’s playing an important role in direct financing and facilitating economic development,” the China Securities Regulatory Commission says in a statement announcing the rules on July 9. “Formulating rules to regularise the activities of private investment funds will be beneficial for healthy growth of the industry, and investor protection.”

The rules, which will come into force on September 1, provide a “much-anticipated” legal framework, particularly for private equity and venture capital funds, according to Yoon Ng, principal, asset management global advisory services, at Broadridge Financial Solutions.

“They are designed to better protect investors’ legal rights, promote standardisation, and crack down on illegal financial activities, allowing greater alignment with global standards,” Ng tells Asia Asset Management. “They are also expected to provide differentiated supervision for different types of funds, with more favourable treatment for venture capital/early-stage companies, and promote government economic priorities.”

As of May 2023, there were 153,000 private investment funds in China with 21 trillion RMB (US$2.91 trillion) of combined assets under management, according to figures from the Asset Management Association of China.