China To Impose Tighter Laws On ‘Wild East’ Hedge Funds

China’s hedge fund operators will face more stringent laws, Asset Management Association of China (AMAC), a self-regulatory industry body that oversees private funds, reportedly said late Friday.

The move is the latest in the efforts by Chinese regulators to clean up the country’s loosely regulated investment banking industry, described by some as the “wild east” because of rampant fraud and rising numbers of shell companies.

AMAC regulates private investment funds, which raise capital from investors by means of non-public offerings within the territory of the People’s Republic of China.

Many of China's private investment funds are essentially private investment trusts functioning in the style of hedge funds. The funds were unregulated until June 2013 when China's new fund law was implemented.

The new rules are intended to further protect investors' legal rights and to regulate the private fund management industry, AMAC said. The rules will also require fund managers to fully disclose their investment risks, review the identities of investors, and set up special accounts to manage capital, Reuters reported.

The newly announced rules are reportedly slated to come into effect in July.

About 69 percent of the 25,901 Chinese private funds registered as of March end were zombie companies that exist on books but do not have any investments, China Money Network, a local financial newspaper said Friday.

This is the second time this year that AMAC has tightened controls on the private funds landscape after it introduced new management qualification requirements and product controls before the Chinese New Year, a week-long holiday in mainland China in February.

The association had said it would revoke the licenses of fund managers who failed to launch products by two separate deadlines in May and August, sparking a race to save registrations.