The national legislature is working on a draft law on stock funds that authorities hope will become a stabilizing force in the nation's sluggish stock market.

Stock funds are mainly mutual funds that invest primarily in stocks and are operated by investment companies.

They are attractive because most of the 64 million stockholders in the Chinese mainland's stock market invest individually and are generally weak in shielding off risk and are more vulnerable to market fluctuations.

Retail investors pay a fee to invest their pooled money in order to see more stable returns on investments through the use of professional fund managers.

While there are about 50 stock funds in China, they are currently governed by only a temporary regulation.

A more sophisticated law would oversee all registration and activities of investment companies that run stock funds and help add a more orderly presence to current immature market sentiments, according to sources with the legislature.

The draft law, which has been studied by the legislature for three years, is most likely to go for a first reading at the bi-monthly session of the National People's Congress (NPC) Standing Committee at the end of this month.

The standing committee represents the entire legislature on matters that take place outside the NPC's annual meeting.

The proposal was first initiated by the Finance and Economic Committee of the NPC in 1999.

The temporary regulation on the management of stock funds, issued by the State Council in 1997, has contributed greatly to the trial operation and development of stock funds, sources with the NPC said.

But the temporary regulation does not suit the fast developing stock fund market, particularly now that China is a member of the World Trade Organization.

The legislation is expected to include stipulations that standardize the operation of investment companies and check for irregularities such as opaque operations and late disclosures of information.

Currently most stock funds in China are close-ended, which means there is a fixed number of total shares available.

Close-ended stock funds also cannot be resold to a company for a fixed period of time and shares can only be traded among other investors. In this way, the total investments of the fund remain unchanged.

Open-ended funds, on the other hand, are more common in the West and availability is based on demand. In China, investors can only buy and redeem their shares at banks. They cannot sell them in the market during the life of the fund.

China's first pilot open-ended fund management firm debuted last March and there are currently four other open-ended funds on the market.

(China Daily August 7, 2002)