The China Securities Regulatory Commission (CSRC) and the two stock exchanges will also enhance regulations by establishing a market-oriented evaluation system for the fund managers.

Any institutions that apply to set up fund management companies now must hand over to the exchanges a written promise to act legally and ethically and allow regular oversight by the government and the public.

If caught with irregularities during the application process, the applicant would be rejected.

Those already in the business must also strengthen their internal controls and publicly answer to regulators when suspected of irregularities.

The CSRC and the stock exchanges will become more efficient at monitoring those accounts of anyone suspected of wrongdoing.

Those breaking the rules would first receive a verbal or written warning. Serious irregularities would face further investigation and severe punishment.

While tightening regulation of the fund industry, authorities also will expand the ability of investors and firms to organize fund companies.

The CSRC also issued a circular on Thursday encouraging companies besides securities and trust firms to participate in the funds management business.

Most of China's 14 fund management companies were founded by securities or trust firms.

A wider range of participants in the fund management business would greatly increase the number of institutional investors, analysts said.

Authorities also are considering the introduction of a Qualified Institutional Buyers system to ensure more transparent and standard stock underwriting by qualified institutional investors.

China's fund industry recently underwent a corruption sweep in March that found evidence of abnormal trade in eight of 10 fund management companies.

The authorities have been readjusting rules in the sector to upgrade market regulations, rebuild public confidence and urge fund managers to improve themselves.

Among those efforts, CSRC now requires that one-third of corporate board directors of fund management firms be independent and not own portions of the company.

(China Daily 06/16/2001)