Adapting Private Equity to Company Law or Vice Versa? – Understanding Some Key Determinants of a Strong Private Equity Market in the China Context

Abstract

Empirical research and conventional wisdom indicate that key determinants of a vibrant private equity market include a deep and liquid stock market, light tax regime, more tolerant insolvency law and functioning legal system. In a comparative law sense, China has a bank-centred capital market and a weak legal system (i.e., corporate governance, investor rights protection, law enforcement and judiciary) which are theoretically incapable of nurturing and supporting strong private equity activities. Nevertheless, surprisingly, China is widely treated by the private equity circle as the most attractive destination and the private equity investment into China ranks as the second worldwide, right after the United States. This article tries to interpret how these conventional determinants work in a Chinese context, and more importantly, to study, in terms of the growth of private equity, whether the US-rooted private equity should adapt itself to a less user-friendly company law regime or vice versa.

Keywords: Strong Private Equity Market, Weak Chinese Company Law, Review of Key Determinants