On Monday China’s funds regulator announced that it had cancelled the licenses of over 10,000 hedge funds in the country’s financial sector as part of its crackdown on China’s poorly regulated fund management industry.

According to a press release on the closures from the Asset Management Association of China, a large proportion of the hedge funds shuttered by authorities “had no intention of getting into the business,” and some of the funds “engaged in illegal fundraising for illegal and criminal activities under the guise of funds, cheating the public.”

It’s unclear how many of the funds were wealth management products masquerading as hedge funds. Wealth management products have been described as the biggest “deposit” base of China’s shadow bank and a systematic risk to China’s economy.

BoA: China’s Wealth Management Products Pose Systematic Risk

Hedge fund crackdown continues

China’s young hedge fund and asset management industry has exploded in popularity over the past few years. According to the data released by AMAC, the total number of hedge fund managers registered in China reached 24,625 by December 2015, a 69% increase from January 2015 — a development ValueWalk covered at the end of last year. See: Chinese Hedge Fund Launches Swell As Count Nears 25,000!

However, as the number of money management firms has exploded, so has the number of recorded crimes in the financial services sector. The China Securities Regulatory Commission started clamping down on hedge fund crime last year and during a regular weekly conference on January 15, the regulator announced that it had CSRC investigated 141 hedge funds in 2015 and punished more than 30 institutions. The total amount of fines and confiscated funds for illegal financial activities reached RMB5.4 billion in 2015, 1.5 times the sum of the previous ten years.

 

China, 2015 Stock Panic, A-Share Bubble hedge funds
China cracks down on fraudulent hedge funds

To help crack down on hedge fund crime, the Asset Management Association of China imposed a set of stringent new rules on the sector earlier this year. The rules, which officially came into force last month, require fund managers to disclose their investment risks fully, review the identities of investors, and set up special accounts to manage capital.

These rules are designed to stamp out “phantom” funds that have been awarded an AMAC licence (a legal requirement for operating a hedge fund) but have used this authorisation to cover fraudulent activity.

In addition to these new reporting standards, the AMAC has introduced a requirement that all fund managers and senior managers of fund companies will have to pass its first nationwide qualification exam for private investment fund practitioners this year or risk being barred from raising money for next year.

Ahead of the introduction of this requirement the CSRC and AMAC announced that more than 2,000 asset management companies could be forced out of the market unless they gained the relevant qualifications to meet compliance requirements.

And elsewhere, in January of this year,  China’s New Third Board, or NEEQ, suspended listings by certain types of financial firms. As ValueWalk reported at the time, the NEEQ is designed to help small and medium-sized enterprises access capital, and as with most growth exchanges, the listing rules are not as onerous as those of the country’s main exchanges.

Companies that would usually have to wait in line for years for a listing on one of China’s main exchanges can list on the NEEQ in just a few months and firms have been taking full advantage of this. At the beginning of last year, the number of companies listed on the exchange was only 350. However, by November, the number of enterprises listed had risen to 1,271 with 3,500 companies working with securities brokerages towards a listing. The third board suspended listings by certain types of financial firms, including P2P lending companies, pawnshops, and private equity companies to clamp down on the raising of funds by fraudulent companies.

China Hedge Funds