The Shanghai Pudong Development Bank has become the first Chinese bank to provide guarantees for mutual funds, breaking the stereotype that banks are just sales agents for investment fund products in China.

The Shanghai-based shareholding bank has been chosen by Beijing's Harvest Fund Management Co, which will start to issue a guaranteed fund today. The bank is both the custody and guarantee agent.

Such arrangements will enable the bank to monitor fund investment activities more efficiently and avoid risks in the process, said Huang Jianping, vice-president of the Shanghai development bank.

A guaranteed fund is a type of fund that has a special agency providing guarantees for the safety of the principal for fund buyers during a set investment period.

It is often more popular among more conservative investors who are unwilling to shoulder investment risks, especially at times when the stock market is sluggish.

The first three guaranteed funds issued by China's fund management companies were guaranteed by non-banking institutions, though according to international practices, banks are usually the first choice.

A non-developed capital market and lack of hedging products have put in place obstacles for banks taking the roles of guarantors for mutual funds, said Huang.

Progress being made now shows that Chinese funds businesses are catching up with international standards, said Raphael Blot, Managing Director of Equity Derivatives & Structured Products of SG Securities (HK) Ltd.

The French bank is the monitoring agent for the Harvest guaranteed fund. It is to ensure security of assets by closely monitoring the balance between equity and bonds in the portfolio.

The joint efforts of the three parties are a combination of foreign expertise with local resources and securities investment with banking services, analysts said.

"I think it is a future trend to have banks guarantee such funds. They have considerable expertise in risk management and sufficient asset strength," said Wang Yonghong, Managing Director of Harvest Fund Management.

The system means that banks are no longer sales agents or custodians of mutual funds.

"We can work together with other businesses to design more diversified products to meet market demand," said Huang Jianping of Shanghai Pudong Development Bank.

"Exploration with Harvest lays a basis for other innovation in the future. We need to find new profit sources," Huang said.

As the State Council has agreed in principle to let qualified commercial banks launch fund management companies, there is certainly greater scope for business innovation.

Some banks have already expressed interest in participating in fund management directly and have put forward initial applications, although they still need approval from banking and securities regulators to be able to participate.

The pace of innovation is also quickening in existing funds businesses in China, which have experienced a fast-expanding group of Sino-foreign joint ventures during the past few years, lured by market potential and a 11 trillion yuan (US$1.3 trillion) savings pool.

AIG-Huatai Fund Management Co, which is still waiting for final approval to begin business, has already been preparing mutual funds and is planning to submit applications.

(China Daily October 18, 2004)