China cracks down on illegal fund-raising

In a move aimed at protecting individual investors and savers, China’s financial regulator is to banish more than 2,000 investment firms from its private fund industry.

According to a former member of the China Securities Regulatory Commission, and following several thousand complaints since the beginning of the year, the financial authorities are taking measures to curb investment fraud and introducing reforms to encourage inflow into properly licensed funds.

‘This is just the beginning of the clean-up,’ the former CSRC employee told the Financial Times, speaking anonymously. ‘We will see more efforts to improve disclosure standards and eventually the introduction of inspections to verify the information provided by private managers.’

The country’s private fund sector, which represents RMB5 tn ($769 bn) of assets under management, has been regulated since mid-2013 but authorities have reportedly struggled to perform accurate checks on the high number of new firms entering the market. The sector is extremely fragmented, with around 25,800 private investment firms operating on the market and 90 percent of them reportedly managing less than RMB1 bn.

The decision follows a three-month, government-initiated crackdown on illegal fund-raising ‒ with a focus on asset management, peer-to-peer lending and private equity ‒ that resulted in a registration standstill for new financing firms.

Indeed, headlines have been rife with e-financing ventures taking advantage of individual investors’ gullibility. A once booming peer-to-peer online lending firm called Ezubao saw its founder Ding Ning arrested alongside 20 of his staff in February this year after the CEO embezzled large sums from more than 900,000 depositors.

That followed the public scandal created by Fanya Metals Exchange, which swindled $6 mn from savers via an investment product advertising high returns and flexible withdrawals.