The China Securities Regulatory Commission has issued draft legislation to allow principal investments, creating a formal framework for domestic private equity. The scheme is currently open to securities companies, and is expected to include banks and insurance companies soon. Companies meeting the CSRCÆs criteria can apply for the first batch of approved statuses and participate in the schemes.

In its issued statement, the CSRC says institutions applying to the scheme should have a minimum of Rmb2 billion in net capital, a complete risk control mechanism, three years of experience dealing with equity securities, 10 years of experience with bond securities and over Rmb15 billion in transactions over the past year.

Domestic institutions have entered PE deals on a case-by-case basis; the new legislation will put this on a broader footing.

Among securities firms, Citic Securities and China Investment Capital Corp (CICC) have been allowed in the past to invest up to 15% of net assets in a subsidiary company through which they can invest as principals in third companies. The two biggest life insurance companies, China Life and Ping An, have recently been allowed to invest in infrastructure projects via newly established asset-management arms.

Quasi-sovereign entities have also been allowed to invest in PE deals, such as China Development Bank co-investing with the Tianjin provincial government in the Binhai Angel Venture Capital Fund, which takes stakes in land and companies in the Binhai area of Tianjin. And the National Council for Social Security Fund is one of the key investors in Haitong Fortis Private Equity Fund Management, in which the Belgium government also holds a stake.

The proliferation of so many financial institutions keen to invest directly in private companies and projects led the government to set out general rules. The government is also keen to free trillions of renminbi for infrastructure financing, within a framework that maintains government control.

A spokesman at the CSRC says the scheme will ensure effective internal control and prevent conflict of interest between securities companies and its other subsidiaries at this stage. It is also meant to introduce transparency into the private-equity business.

ôThe government is trying to get rid of the fly-by-night operators and other smaller operators and unknown entities trying to control huge stakes of infrastructure,ö says an industry source familiar with the situation. ôAlso, there are many cash-rich institutional investors in the market now. The government wants to make sure these institutions are being sensible,ö he adds.

Zhang Haochuan, analyst at Z-Ben Advisors, a Shanghai-based consultancy, notes that prior to the legislation, the CSRC had acted on a case-by-case approval basis. The new framework will streamline the regulatory work on private-equity investment, which previously had not been regulatorÆs main concern until the huge amount of liquidity started becoming a problem in the investment boom from 2005.