China tightens scrutiny on $9.3 trillion fund industry

China’s top securities regulator pledged on Monday to crack down on mismanaged private funds and weed out fake ones, as the government becomes more assertive in dealing with an industry worth 60 trillion yuan ($9.28 trillion).

China has been seeking to channel more household savings into the capital markets to fund innovation and aid its economic recovery, while reducing the economy’s reliance on bank lending.

Fund managers should align their interests more closely with investors, and refrain from hyping their products, Yi Huiman, chairman of the China Securities Regulatory Commission said.

“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,” Yi told a meeting held by the Asset Management Association of China.

Chinese mutual fund managers also face rising competition from global asset managers such as BlackRock (BLK.N) and Fidelity International after regulators scrapped foreign ownership in the sector on April 1, 2020.

By July-end, the country’s mutual fund industry stood at 23.5 trillion yuan, 1.6 times the size at 2016-end, Yi said.

The private securities fund sector doubled to 5.5 trillion yuan, and its private equity and venture capital industry tripled to 12.6 trillion yuan during the period.

Despite a recent cleanup of China’s private fund industry, there’re still many small and weak players hampering the high-quality growth of the sector, Yi said, adding that the regulators will publish new rules in due course.

Some private-fund managers even raise money publicly, and misappropriate clients’ funds, he added.

Yi urged fund managers to prioritize clients’ needs and interest, as “it happens from time to time that funds make money, but investors don’t”.

He asked money managers to address the issue of fund churning, in which fund salespeople, seeking higher commissions, encourage investors to redeem existing funds and subscribe to just-launched ones, resulting in massive fund flows.