China to issue formal regulations on private equity

The proposal comes as the State Council concludes its test run of private-equity funds and issues four more licenses to firms with onshore investments.
ChinaÆs State Council says its test-pilot programme for domestic private equity is nearing a final stage. It is giving out four more licenses to private-equity firms for onshore investments. The four include a water utilities fund, an industrial-focused fund for ChinaÆs northeast, a Tianjin shipping industry fund, and another invested in urban infrastructure.

In particular, the Huayu water utilities fund is said to have already attracted financial backing from the China Development Bank, the National Social Security Council, the China Postal Saving Fund and Berlin Wasser. The Tianjin shipping fund is also said to have attracted RMB20 billion in financial commitments from domestic investors.

The State CouncilÆs move will bring the total number of approved private-equity houses to 10 in China. These include the previously approved Shanxi-based energy fund, a Guangdong nuclear power private fund, a Shanghai financial fund and two funds invested in high-tech industries. These funds are said to be running a total of RMB160 billion.

The earliest fund to win the CouncilÆs approval was the Bohai Industrial Fund, which was first launched in November 2006 as a pilot project by the Tianjin municipal government. It boasts an AUM of RMB6.08 billion and has financial backers from ChinaÆs National Social Security Fund to the Postal Saving Fund, China Development Bank and Bank of China International.

Concurrent to the expansion of the State CouncilÆs test-pilot scheme, ChinaÆs National Development & Reform Commission (NDRC) says it is forming a taskforce to draft rules that will formally recognise and regulate private-equity investments in China.

The NDRCÆs new rules will introduce market-based principles and encourage sustainability in the industryÆs development. It will also streamline the approval process, regulatory powers, and list requirements for investors and investment managers coming to the industry.

The China Securities Regulatory Commission (CSRC) has also recently issued a draft law on M&A advisory activities.

A private equity investment in China is still made in a lawless world. Deals often have to go through a plethora of regulators, ministries and councils on a case-by-case basis, with varying degree of success or transparency. Fund managers can hope the new series of regulations will bring clarity to the process û but they could also signal red tape.
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