Beijing has announced it's revoked licences and shut down operations at thousands of hedge funds across the country, as it takes on 'phantom managers' who use them as fronts for illegal business. The government wants to clean up its financial sector, but as Grahanm Mackay reports, the knee-jerk reaction has its drawbacks.
Ten thousand hedge funds wiped out in just six months. Chinese regulators on Tuesday spelling out the impact of a sweeping crackdown on an industry so riddled with fraud, it's known as the 'Wild East' (SOUNDBITE) (English) REUTERS CORRESPONDENT ENGEN THAM, SAYING: "There are often entities that look as though they're funds, and it gives them a venire of legality, so people actually think that they are proper funds, whereas in fact they carry on criminal activities. There have been a massive array of illegal activities, from managers that run away to with a lot of people's invested funds, to certain funds engaging in illegal fund raising or making high interest rate loans." Chinese hedge funds were thrown into disarray earlier this year when Beijing brought in tough new rules to weed out shady dealings. At the heart of the problem, so-called "phantom managers", who register funds but never actually issue products... They're just fronts for crooked business. Beijing has brought in strict new rules about qualifications needed to start a fund... But many analysts say the process has been rushed, and that could have a serious impact on the economy. (SOUNDBITE) (English) REUTERS CORRESPONDENT ENGEN THAM, SAYING: "The rules came in and they weren't really warned about the rules and as a result because registrations have been halted in many different cities over the course of this year, means that activity within this sector has significantly slowed down or in all certainties stopped altogether." Problems or not, this almost certainly won't be the last we hear of funds being shut down and licenses revoked. Analysts expect at least another two thousand managers to loose their business... Damage control for Beijing as it tries to lure in investment in uncertain times.