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)