China has made its first move to regulate Private Equity, according to Coco Kee, Managing Partner of Kee Global Advisors LLC, a New York-based boutique advisory firm. Not a bad move at first glance, as we wrote about the need for regulation in an article that was covered by The Wallstreet Journal more than two years ago.
The problem with most regulations is not that they are not needed, but they are implemented without a clear reference, rationale or script to the goal they aim to achieve. Put differently, many are band aids to cover the cancer sores that may make the audience feel better, but in no way delivers a cure for the patient.
Private Equity and Venture Capital have been allowed to deploy a financial arbitrage that is in flagrant violation of free-market principles, and without an enforcement of anti-collusion, anti fragmentation of risk, marketplace transparency to all participants and other strict free-market principles, can never avoid the creation of investment bubbles that destroy the opportunity and faith in the underlying assets.
For China the implementation of free-market principles are farther afloat from their economic foundation than it is to us in the U.S., but if we keep messing up our economic freedom China may just get there before we do.