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New laws aimed at private funds

By Wang Fei’er (Global Times)

08:11, June 28, 2012

As many as 92 privately offered fund products wound up in the first half of this year, a record high, according to figures Shenzhen Rongzhi Investment Consultant Co Ltd, an independent data provider which covers privately offered funds in China, issued Wednesday.

The wind-up of these products is mostly due to illegal fundraising and insider trading, a spokesperson from the company told the Global Times.

These numbers come less than a day after the National People's Congress Standing Committee, China's top legislature, proposed new rules which would bring privately offered investment funds under regulatory supervision in order to stem illicit financing practices.

Most of the laws governing investment funds in China, which went into effect in 2004, do not cover privately placed funds. But, as these largely unregulated products become more popular with investors, the country's financial system faces mounting risks. At present, only local administrations of industry and commerce hold authority over privately offered funds. However, these bodies have no mandate to supervise how private funds secure or manage their capital and often only interact with these investment groups in order to periodically collect taxes from them.

When risk-heavy privately placed funds first emerged in the mid-2000s, investors were cautious and few in the capital market were willing to tap into these products, which discouraged financial regulators from giving these funds much attention, Qiu Yanying, a securities investment fund analyst with TX Investment Consulting Co, China's first open-end fund company licensed by the country's securities regulator, told the Global Times.

However, privately offered funds have become an important funding source for cash-stripped small and medium-sized enterprises in China thanks to the credit crunch seen in the country during recent years, Qiu said.

China's private funds were worth a combined 160 billion yuan as of the end of last year, up 33.33 percent year-on-year, according to figures Shenzhen Private Equity Association (SPEA) released on March 8.

But unlike managed publicly offered funds, the providers of private fund products are neither required to disclose financial information nor subject to any consequences for fund management irregularities, said Gao Chen, a privately offered fund analyst with Shanghai Securities.

This lack of oversight has allowed agent companies to essentially trick institutional investors into investing in non-transparent or poorly run companies in a bid to get high commission fees from these firms, most of which are desperate for capital, Gao explained.

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