CHINA’S equity-focused asset management industry, mired in a long stock market slump, hopes to find new sources of profit in the growing domestic debt market by launching the country’s first bond-targeted funds.

　　But analysts said they did not expect this new business to grow very quickly as China’s debt markets are still relatively small and illiquid and risks lurked with interest rates at near 50-year lows.

　　“There are only a limited number of bonds listed on the exchanges which can be traded publicly,” said China Securities analyst Hu Zhiguang.

　　“Bond trading on the interbank market is also not active, so the market cannot absorb too many bond funds. We expect only two or three bond funds in the near term.”

　　Huaxia Fund Management is expected to launch China’s pilot mutual fund wholly devoted to bonds issued by the government and companies today.

　　China Southern Fund Management is inviting investors for a mutual fund that will be 95-percent invested in bonds, with subscription to close Thursday.

　　Both funds have to be at least 200 million yuan (US$24 million) under Chinese regulations.

　　“China’s funds used to target mainly the stock market,” said analyst Gao Chuntao of Ping An Securities.

　　“But a stock slump since the second half of last year has inflicted heavy losses on market players, including funds. Investors are paying more attention to risks in the stock market, paving the way for bond-oriented funds,” she said.

　　China’s indices plunged in the second half of last year as a broad government crackdown on irregularities and a plan to sell off some of the government holdings in listed companies soured sentiment and raised liquidity fears.

　　Prices recovered slightly this year, but are still down nearly 30 percent from their peak in June last year due to poor corporate earnings and frequent share offerings.

　　China’s 54 closed-end funds, managed by 21 companies, made a combined loss of 1.1 billion yuan from stock transactions in the first six months of this year, versus 1.4 billion yuan in profits from bond investments, interim results reports showed.

　　The government has also approved around 15 open-ended funds since August last year, hoping to attract more institutional investors to stabilize markets now dominated by volatile retail punters.

　　However, analysts said there were inherent problems with the debt markets which had to be solved before investment would take off.

　　For example, most bonds are issued to the interbank market, rather than to the exchanges, and banks tend to hold bonds to maturity rather than trade them.

　　(SD-Agencies)