Chinese money managers are likely to face product-innovation pressure and may meet regulatory hurdles over selling off funds quickly in a time of excess liquidity, according to industry experts.

 

The country's stock regulator has yet to approve the sales of any new mutual funds that invest in yuan-backed shares since early September.

 

Industry sources told Shanghai Daily that the watchdog is growing more serious over controlling liquidity and is tightening oversight of funds' operations to ensure a steady market performance.

 

"How soon you can get approvals to start the fund sales depends on regulatory attitudes," said a Shanghai-based funds source, who asked to remain anonymous. "If the watchdog deems the market is too hot, it may even take more than half a year for you to obtain the green light after submitting an application."

 

China's mutual funds industry has grown from nearly scratch nine years ago to about US$280 billion in assets under management as people moved out of low-yielding bank deposits to seek better returns in securities.

 

Equity-invested mutual funds now account for more than 80 percent of the total funds products and their bold investment strategies have stoked up regulatory worries over potential fallouts if sentiment turns sour, insiders said.

 

Many actively managed equity funds have lagged behind the performance of the benchmark indices in the past year as market volatility increases.

 

"Apparently equity funds don't have enough hedging tools to counter downside risks on the mainland market," said Luo Zhiping, a Chinalion Securities Co dealer. "That makes their products similar. As market sentiment is good, sales are fine. If it turns bad, redemption is set to be heavy."

 

China's stock market doesn't have a short-selling mechanism. The domestic bourses are also short of other financial derivatives and don't have a solid corporate-bond sector.

 

The China Securities Regulatory Commission recently issued notices to urge funds firms to beef up management and sales as well as pushing forward new products in a bid to develop a healthy institutional investor base.

 

The stock regulator in June expanded the Qualified Domestic Institutional Investor project to fund management firms and brokers to allow them to help invest client capital in overseas equity markets.

 

So far, four fund ventures have launched their QDII products, which received a warm welcome from mainland investors wishing to ride the steady growth of international markets, especially Hong Kong-traded stocks.

 

Companies that have conducted dual listings still see their Hong Kong-listed shares trade at a considerable discount to mainland counterparts, which have more than tripled in value in the past two years.

 

The QDII schemes launched by fund ventures have all pledged to place a big chunk of assets in Hong Kong-traded shares or stocks of companies that derive a majority of revenue from the mainland.

 

"The QDII campaign is a chance for fund managers to diversify businesses but they must first prove they have the abilities to reap steady returns for clients," said Lin Mengwei, a Guosen Securities Co investment adviser. "The new business may take some time to help funds firms in their bottom lines."

 

Industry insiders say that more innovative products, including certain types of closed-end funds and principle-guaranteed funds, are in the pipeline.

 

(Shanghai Daily October 29, 2007)