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)