China Securities Regulatory Commission (CSRC) pledged on Monday (Aug 30) to tighten scrutiny on
the country’s 60 trillion yuan (S$12.5 trillion) fund industry.
“China is actively promoting high-quality growth of its capital markets, and healthy development of the 60 trillion yuan fund industry is a crucial part of it,” Reuters quoted Yi Huiman, chairman of CSRC as saying during a meeting held by the Asset Management Association of China.
Last month, China’s mutual fund industry stood at 23.5 trillion yuan, 1.6 times the size at the end of 2016, while its private equity and venture capital industry tripled to 12.6 trillion yuan during the period, according to Yi.
Despite a recent cleanup of China’s private fund industry, there are still many mismanaged private funds and regulators plan to weed out fake ones.
Some private fund managers even raise money publicly, and misappropriate clients’ funds, Yi said.
The official also urged money managers to align their interests more closely with investors as “it happens from time to time that funds make money, but investors don’t”.
Yi also asked fund managers to address the issue of churning and refrain from hyping their products.
Churning occurs when brokers enrich themselves at the expense of their clients. Once investors make money from a fund, distribution channels will advise them to buy a new fund as the channels want to earn more commissions.
Beijing has introduced a slew of regulation in the past few months, slapping companies with fines, banning apps from stores and demanding that some firms completely overhaul their businesses.
The regulatory crackdown on internet-oriented technology enterprises, private education firms and overseas listings, has been disruptive to global markets, triggering major financial losses for investors.
The move has wiped out billions of dollars in market value from China’s internet giants.
According to Fitch Ratings, the abrupt way that some policy changes have been introduced has prompted international investors to reassess their overall exposure to current and future China regulatory risk, with some set to quit the market.
The crackdown is “unprecedented in terms of its duration, intensity, scope, and the velocity of new policy announcements,” Goldman Sachs analysts wrote in a research report. “Chinese authorities are prioritizing social welfare and wealth redistribution over capital markets in areas that are deemed social necessities and public goods,” they added.
But the way Chinese authorities see it, the efforts to rein in private enterprise are meant to protect the economy and fix longstanding concerns around overwork, data privacy and inequality in education.
Jeffrey Kleintop, CFA, Managing Director and Chief Global Investment Strategist at Charles Schwab, argues that China’s stock market pullback this year has been in line with the average annual drawdown. However, the recent drop seems to be driven by a regulatory crackdown, not an economic slowdown, with the market not responding to the economic outlook, but to the policy uncertainty.
Ray Dalio, founder and co-chairman of Bridgewater Associates LP, wrote in a LinkedIn post to investors that Beijing has supported rapid but steady development of capital markets and openness to international investors, although regulators can create confusion when trying to strike the right regulatory balance in fast-changing markets.