China: A Financial Services Regulation (PRC Firms) Overview

China’s private funds market delivered a structural rebound in 2025, operating within an increasingly regulated and policy-directed framework. Institutional LPs made 9,319 capital commitments – a 36% year-on-year increase – with total commitments reaching RMB1,824.3 billion, up 43% from 2024. While signalling recovery, these figures underscore a fundamental recalibration: fundraising, deployment, and exits now function within tighter supervisory boundaries, with state capital driving allocation toward semiconductors, artificial intelligence, and advanced manufacturing.

Market Dynamics and Capital Structure

State-owned capital – government fiscal funds, guidance funds, and state-controlled institutions – has consolidated its position as the dominant LP base, serving as "patient capital" willing to accept extended lock-ups for strategic alignment.

Insurance capital has reinforced its role as a vital long-term funding source. By year-end 2025, insurance investment in private equity funds reached approximately RMB6.8 trillion, reflecting significant growth and sustained support for the equity investment market.

This institutional-investor-dominated structure has accelerated fund manager consolidation. Registrations have declined steadily since the 2023 deregistration peak, driving migration toward larger, compliance-capable platforms. Smaller managers lacking robust infrastructure face mounting pressure.

Government Guidance Funds: Policy Breakthrough

The State Council’s 2025 “Guiding Opinions on Promoting the High-Quality Development of Government Investment Funds” repositioned guidance funds as professional long-term capital with mandates to crowd in private investment and address strategic priorities. The breakthrough: introduction of loss-tolerance mechanisms and duty-of-care safe harbours – signalling that prudent investment decisions resulting in losses will not automatically trigger liability. This shift addresses friction that discouraged higher-risk allocations in early-stage venture and deep-tech sectors.

Provincial and municipal governments – including Guangdong, Shanghai, Chengdu, and Shanxi – rapidly introduced supporting measures, standardising local operations. Newly established funds in Beijing, Shanghai, Jiangsu, and Guangdong adopted terms exceeding 10 years, some extending to 20 years, compared to the previous seven-eight-year norm. This allows funds to hold through portfolio companies’ explosive growth phases.

However, 2025 brought stricter operational requirements through management fee adjustments: (i) annual rates reduced from 2% to 1.5% or lower; (ii) calculation bases narrowed from total committed capital to paid-in capital or invested amounts. These changes compressed fixed income for managers, challenging fundraising timelines, investment efficiency, and cost control.

Sci-Tech Innovation Bonds and Cross-Border Capital

Science and technology innovation bonds expanded rapidly, mandating minimum allocation thresholds – typically 50%+ – to semiconductors, new energy, life sciences and healthcare, and advanced manufacturing, addressing asset-liability mismatches constraining patient capital formation.

China introduced institutional opening policies significantly improving conditions for foreign-funded private equity. The April 2025 “Opinions on Implementing the Strategy to Upgrade Pilot Free Trade Zones” emphasised investment liberalisation, with Hainan’s Free Trade Port advancing cross-border asset-management pilots from August. However, heightened scrutiny around data localisation, information security, and substantive local presence remain prerequisites.

A critical uncertainty emerged regarding QFLP taxation: speculation suggests tax authorities may characterise foreign LP distributions as “business income”, potentially establishing “permanent establishment” status within China. This interpretation would significantly affect foreign LP tax liability and compliance complexity, requiring close attention in cross-border planning.

Exit Channels: Diversification as Imperative

Exit architecture has fundamentally diversified beyond IPO-centric models. Hong Kong reclaimed its position as a leading global IPO venue, raising HKD 272.1 billion through A+H dual listings and mega-transactions. Mainland A-share markets remained selective, with regulators maintaining heightened scrutiny. PE/VC-backed exits stabilised at moderate levels, with managers treating IPOs as one component within diversified exit architecture.

The onshore RMB secondaries market matured significantly, supported by state-capital participation, GP-led restructurings (including continuation vehicles), and standardised transfer protocols in regional equity centres. These developments reflect a shift toward engineered liquidity solutions – extending hold periods for select assets, rebalancing portfolios, and creating structured pathways for earlier LP exits.

Buyouts and Structural Innovation

On 16 May 2025, the CSRC amended the “Measures for the Administration of Major Asset Restructuring of Listed Companies”, shortening lock-up periods, allowing staged payments, and streamlining reviews – creating expanded opportunities for private equity M&A participation. On 31 December, the National Financial Regulatory Administration released the “Measures for the Administration of Commercial Bank M&A Loans”, broadening the scope for buyout funds and reducing capital pressure.

Domestic sponsors raised larger RMB buyout funds with two structural trends gaining prominence:

• Single-Asset “Project Funds” targeting individual control transactions offer LPs clearer risk–return exposure, faster decisions, and predictable fee economics.
• Co-investment funds: Investors increasingly regard co-investment rights as core terms, enabling direct participation in high-quality targets beyond fund shares. Having paid management fees and carried interest at the main fund level, investors seek exemption in co-investment structures to reduce costs and improve capital efficiency. The 2025 regulatory environment clarified “fundraising nature” criteria, making proper fund filing mandatory – previous avoidance practices are no longer feasible.

Regulatory revisions introduced “reverse linkage” provisions tying post-transaction lock-up periods to pre-transaction holding durations: longer pre-deal equity seasoning results in shorter post-M&A restrictions, rewarding patient capital with improved liquidity.

Regulatory Architecture: Compliance as Competitive Advantage

Four key compliance developments tightened entry requirements in 2025:

• Enhanced Registration Review: September 2025 AMAC updates strengthened assessment criteria for controlling shareholders and actual controllers, emphasising fiduciary management responsibilities.
• Optimised Change Procedures: October 2025 revisions eliminated the two-thirds investor approval threshold for manager changes, streamlined processes, and improved judicial co-ordination.
• Strengthened Compliance Requirements: AMAC’s February self-inspection notice required strict information consistency checks, while June notices urged enhanced credit checks, timely significant event reporting, and standardised filing materials.
• Credit System Establishment: There was the August 2025 launch of quarterly credit information reports for private fund managers, accessible via the AMBERS system.

Outlook: Navigating the New Equilibrium

China’s investment funds market has transitioned to a more institutional, policy-aligned, and compliance-intensive equilibrium. Several structural trends will shape 2026:

• State-backed and institutional capital dominates LP commitments under extended horizons, demanding strategic alignment and governance rigour. Science and technology innovation bonds provide scalable innovation financing channels.
• Exit planning has fundamentally diversified: Hong Kong IPO momentum, M&A transactions, and maturing RMB secondaries collectively form the liquidity toolkit. GP-led secondaries and continuation vehicles will continue gaining prominence for portfolio optimisation and LP liquidity provision.
• Regulatory intensity has permanently raised compliance thresholds. Managers demonstrating operational excellence and proactive regulatory engagement command capital-formation premiums – compliance is now a competitive advantage, not a cost centre.
• Best-positioned sponsors combine durable domestic LP relationships with state-backed anchors, execution depth in control transactions and GP-led secondaries, rigorous operational and data governance systems, and disciplined multi-channel exit capabilities.

Conclusion

The market’s evolution from growth-at-any-cost to quality-and-compliance-first represents a permanent recalibration. State capital, regulatory intensity, diversified exit architecture, and structural innovation define a new environment rewarding institutional capability over financial engineering.

For limited partners, the market offers compelling opportunities in hard tech and strategic sectors backed by policy support. However, manager selection is critical – operational discipline, compliance infrastructure, and LP alignment separate sustainable platforms from those facing existential pressure.

For general partners, the path forward requires institutional transformation: building governance systems, deepening LP relationships, developing multi-channel exit capabilities, and embedding compliance as a core competency. The market has reset. Those adapting to the new equilibrium will access substantial opportunities in China’s ongoing economic transformation; those resisting face diminishing relevance in an increasingly selective, institutional, and compliance-first environment.