HONG KONG (Reuters) - China plans to tighten oversight of private equity funds set up outside the country by domestic companies, including the disclosure of investors’ identities, to mitigate financial risk and keep tabs on a new wave of offshore fund-raising, four people familiar with the matter said.

FILE PHOTO: A Chinese flag is seen in front of the financial district of Pudong in Shanghai, China, January 19, 2016. REUTERS/Aly Song/File Photo

The intensified scrutiny, however, will likely stymie the flow of money from global and Chinese investors to such offshore funds, which have been raising billions for overseas projects, including Beijing’s Belt and Road program, lawyers and private equity investors say.

“If this happens, some of the attractions of investing in offshore funds of Chinese PE firms will be lost,” said a Hong Kong-based lawyer who works with mainland funds and was aware of the plans.

“If the hand of the Chinese regulator is stretched outside China and the level of scrutiny on foreign investor increases, some of them may not find it something they want to deal with and may look for other ways to deploy capital.”

The move comes amid a wider crackdown by Beijing on debt-backed investments overseas, and opaque, shadow banking-linked wealth management products at home that have been repackaged for use in overseas funds.

Under the plan, the National Development and Reform Commission, or NDRC, the state planner, would act as the governing body of Chinese offshore private equity fundraising activities, the people said.

Chinese private equity firms and other institutions would be required to disclose the identity of the true investors, or “limited partners” -- to get beyond the shell entities many investors use -- the ultimate source of capital and details about the fund managers, they said.

Banks and other financial firms would also need approval from the NDRC before setting up future overseas funds, they said.

“The new policy will treat offshore private equity funds as a ‘sensitive area’ and implement strict control over them,” said one of the sources, adding the current draft regulations are not finalised.

The sources asked not to be named as the information was confidential.

The NDRC did not reply to a faxed Reuters request for comment.

As Chinese private-equity firms become more active in overseas dealmaking, they have been bolstering their offshore fundraising abilities. In October, Reuters reported Primavera Capital Group and CITIC Private Equity were planning to raise new dollar-denominated funds totaling around $5 billion.

Some Chinese companies had been planning to set up project-based private equity funds offshore to better fund their overseas investments, according to people familiar with the companies’ plans.

Many funds have used China’s Silk Road initiative, also known as the Belt and Road program, as a plank for raising money from global investors outside the country. The goal is to spur railways, power grids and other infrastructure projects central, western and southern Asia, as well as Africa and Europe.

Big state-owned banks including China Construction Bank Corp 601988.SS and Bank of China 601988.SS aim to raise billions of dollars from onshore and offshore investors to fund such projects.

But greater disclosure demands could undermine investor enthusiasm for offshore funds for these purposes.

“The government would be reaching too far and make it challenging for Chinese funds to operate offshore,” said a Beijing-based senior private equity lawyer, who did not have direct knowledge of the plans but was asked about is potential impact.

“Which would be great news to international funds - don’t trust Chinese funds,” he said. “They would give your information to the government!”