Beijing to boost scrutiny of Chinese offshore private equity funds

HONG KONG (Reuters) – China plans to tighten oversight of private equity funds set up outside the country by domestic companies, including the disclosure of investors’ identities, to mitigate financial risk and keep tabs on a new wave of offshore fund-raising, four people familiar with the matter said.

The intensified scrutiny, however, will likely stymie the flow of money from global and Chinese investors to such offshore funds, which have been raising billions for overseas projects, including Beijing’s Belt and Road program, lawyers and private equity investors say.

“If this happens, some of the attractions of investing in offshore funds of Chinese PE firms will be lost,” said a Hong Kongbased lawyer who works with mainland funds and was aware of the plans.

“If the hand of the Chinese regulator is stretched outside China and the level of scrutiny on foreign investor increases, some of them may not find it something they want to deal with and may look for other ways to deploy capital.”

The move comes amid a wider crackdown by Beijing on debtbacked investments overseas, and opaque, shadow banking-linked wealth management products at home that have been repackaged for use in overseas funds.

Under the plan, the National Development and Reform Commission, or NDRC, the state planner, would act as the governing body of Chinese offshore private equity fundraising activities, the people said.

Chinese private equity firms and other institutions would be required to disclose the identity of the true investors, or “limited partners” – to get beyond the shell entities many investors use – the ultimate source of capital and details about the fund managers, they said.

Banks and other financial firms would also need approval from the NDRC before setting up future overseas funds, they said.

“The new policy will treat offshore private equity funds as a ‘sensitive area’ and implement strict control over them,” said one of the sources, adding the current draft regulations are not finalized.

REUTERS An employee of the Industrial and Commercial Bank of China Ltd. counts money at one of the bank’s branches at the Shanghai Free Trade Zone in Pudong district, in Shanghai.