China should quickly revise its fund law to help money managers
tighten corporate governance and expand investment channels to
boost returns, industry analysts said.
Potential changes in the law may include letting more
enterprises be shareholders at fund firms, boosting stock incentive
programs for employees and allowing funds to invest in more
derivatives, industry insiders said.
Gui Minjie, vice chairman at the China Securities Regulatory
Commission, said at a financial forum early this month that part of
the existing fund law does not meet with the needs of regulatory
supervision and industry development.
Gui noted that the high industry entry thresholds and strict
investment limitations are not beneficial to the long-term healthy
growth of the fund industry, and that time and conditions are ripe
now to overhaul the law.
Gui urged financial authorities and the country's legislature to
step up efforts to overhaul existing laws, rules and regulations
governing the fund industry as the domestic stock market grows more
sophisticated.
"As the fund industry has soared in size in the past two years,
companies are facing challenges to operate funds on a bigger scale
in a market that is turning more volatile," said Wang Wenming, a
China Securities Co dealer. "It's natural to make changes in the
law to assist them in dealing with problems" that arise as the
industry expands.
One possible change in the law will be to permit more financial
firms, or even non-financial companies, to become controlling
shareholders in fund ventures to boost oversight of their
operations, analysts said.
The existing fund law only allows financial enterprises that
specialize in asset management to be the controlling stake owners
at fund management companies. These institutions include
brokerages, trust firms and commercial lenders.
"We advise regulators to allow insurers, special finance
companies and even large enterprises to have bigger stakes in fund
managers," said Lou Jing, a senior fund analyst at Haitong
Securities Co. "It will not only diversify the shareholding
structure but also improve corporate governance at fund
companies."
Among other potential adjustments, observers believe that it's
very likely fund firms will be granted the right to map out
detailed incentive proposals for their employees and promote
various types of products.
Chinese mainland fund managers and brokerage executives have
long complained that they could hardly gain from the rally in the
nation's stock markets as they are banned from directly trading
stocks.
Some fund and securities executives have already been punished
in the past three years as they had embezzled clients' capital to
trade stocks on their own accounts and incurred hefty losses.
The nation's financial regulators started in June 2006 to look
at offering incentives such as stock options to employees at
domestic fund ventures and brokers as part of a plan to improve
management and curb corruption, sources have said.
But the program has yet to be virtually put into operation due
to various long and arduous preparatory work and lack of support
from fundamental laws, according to people familiar with the
matter.
"It's probably the biggest concern among most bosses of fund
firms that their star managers choose to jump the ship," said Wei
Ming, a West China Securities Co analyst. "Allowing the launch of
stock options can help retain talents and keep funds' performance
steady."
The amended fund law will also likely allow fund management
companies to establish corporate-type funds, which operate as
shareholding firms to make investment, to supplement the current
portfolio of contractual type funds.
Analysts say that the set-up of corporate-type funds, in which
fund holders serve as shareholders, can help boost the rights of
investors and form effective management mechanisms.
The most eye-popping change in the law is expected to be the
expansion of investment vehicles for fund ventures, insiders said.
Currently, mutual funds are limited to investing in stocks and
bonds traded on the nation's equity bourses.
"It's better to permit funds to invest in channels such as
private equity, real-estate investment trusts and open-end fund
products," said Lou at Haitong. "It will let them make full use of
their investment expertise to bring about higher returns for
investors."
(Shanghai Daily December 10, 2007)
