China draws plans for domestic PE regulation

The China Securities Regulatory Commission has taken steps to give the country’s securities firms access to the private equity market, as China continues to formalise its regulation of domestic private equity.

The China Securities Regulatory Commission (CSRC) has issued draft legislation allowing securities firms to make “trial” direct investments. It is the latest of the state’s moves to create a formal regulatory framework for the domestic private equity industry.

Qualifying securities firms must have a minimum of RMB2 billion ($285 million; €182 million) in net capital; they must have three years of experience underwriting equity securities, 10 years underwriting bond securities and RMB15 billion in transactions during the past year; and they must have “a sound internal control and risk management system and a strong capacity of carrying out investment bank business”.

The legislation is an extension of an earlier pilot programme launched in September 2007 under which the regulator allowed CITIC Securities and China International Finance to allocate 15 percent of their net capital to a subsidiary in which they can make direct investments in companies.

The CSRC is widely expected to give banks and insurance companies their turn next. It recently allowed two life insurance companies, Ping An and China Life, to invest in infrastructure projects. In March, the chairman of China’s largest life insurer, China Life, asked the Chinese People’s Political Consultative Conference to allow insurers to invest in private equity funds and make private equity-style investments.

Chinese banks have also asked the state to allow them to launch private equity funds, and many state-owned enterprises are also looking to make commitments to and co-investments alongside private equity funds. In addition, China’s $61.5 billion National Social Security Fund is also rumoured to be in talks to buy stakes in The Carlyle Group,  Kohlberg Kravis Roberts and TPG.

The state has previously approved private equity investments by domestic entities on one-off basis, and last year the state approving six state-sponsored domestic private equity funds targeting various strategic industries. Two of the funds, including a $2 billion fund established in partnership with Singapore’s sovereign wealth fund Temasek Holdings, will be run by Goldman Sachs Gao Hua Securities chairman Fang Fenglei.

China’s sovereign wealth fund, the $200 billion China Investment Corp, has taken large stakes in Western financial institutions including The Blackstone Group and Morgan Stanley.  At a Hong Kong conference today, CIC’s chief risk officer Wang Jianxi said the sovereign fund expects single digit returns this year due to global economic uncertainty, news wire XFN-ASIA reported.