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Open-ended fund to take off
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Yang Yunfei
APPARENTLY undaunted by an investigation that has found rampant price manipulation in its fledgling closed-end fund industry, China has decided to press ahead with the launch of a much-anticipated Western-style open-ended mutual fund.
Xinhua reported on Sunday that the China Securities Regulatory Commission (CSRC), China's markets watchdog, has selected the Shanghai-based Hua'an Fund Management Company to run the country's first open-ended mutual fund.
Xinhua quoted a CSRC spokeman as saying that Hua'an's designation for the pilot fund scheme was based on evaluations conducted by “overseas experts”since last year, indicating that the move was aimed at cleaning up any possible wrongdoing in the process.
Xinhua said that the house-cleaning drive was ordered by the CSRC last year following media reports of widespread irregularities in the operations of the fund management industry.
The CSRC spokesman said that several other fund management firms were also preparing for their own Western-style mutual funds and would be allowed to run the funds when they were judged ready.
Moves are said to be underway to prepare the country's investment fund companies for the transition from closed-end funds to open-ended mutual funds.
The introduction of open-ended mutual funds is one of a series of reforms aimed at upgrade China's equity markets to international standards in the run-up to the country's WTO entry widely expected later this year.
China is keen to expand its fund management industry with the introduction of open-ended mutual funds to stabalize its decade-old, highly speculative stock markets and prepare for tough international competition following its WTO accession.
The CSRC is reportedly making systematic preparations for new fund companies and new financial products in order to boost the role of institutional investors in China's stock markets, which are dominated by retail investors.
Governor Dai Xianglong of the People's Bank of China, China's central bank, reportedly said last week that China aimed to develop various kinds of investment funds and investment banks to tap the country's 6.7 trillion yuan in domestic savings.
Sunday's report came a day after the CSRC revealed the results of a probe of price manipulation in China's fledgling fund industry that found eight out of ten Chinese fund management companies have engaged in questionable stock trading activities.
More than 30 senior fund management personnel have been sacked, demoted or fined, following the blanket probe spearheaded by the CSRC.
The probe was triggered by an expose in the influential financial monthly magazine Caijing that found funds had published misleading information on portfolio holdings and manipulated prices to inflate asset worth.
The report, called “Behind the Funds' Black Curtain,” alleged that fund managers met in saunas, where -- naked and free from worries of wiretaps -- they could plot price rigging schemes.
Analysts said that the probe has delayed the launch of the open-ended mutual funds.
Global investment fund assets have soared to about US$11 trillion some 130 years after the world's first investment fund was launched in Britain.
All US investment funds, accounting for 67 per cent of the world's total, have increased their value nearly 100 times over the past decade. It is reported that more than 40 per cent of US families have chosen to invest in open-ended mutual funds.
Currently, China has ten mutual fund companies which run more than 30 closed-end funds with a value of about 80 billion yuan (US$9.67 billion). All the ten fund companies were launched in 1998.
Compared to close-ended funds, open-ended mutual funds carry a floating asset scale and investors can redeem their funds at any time. It therefore requires more transparency in operation and better fund management.
Officials from Hua'an Fund Management Company said on Monday that the first open-ended mutual fund would start at five billion yuan (US$604.1 million) and target mainly retail punters.
The fund would be for A shares, which are off limits to foreigners, and would be sold through Bank of Communications' outlets with a subscription fee of up to two per cent to be charged.
The successful introduction of open-ended funds is believed to be able to create a more reliable investment instrument for the public to put their savings into the equity markets.
“The introduction of open-ended funds marks a crucial change in investment strategies,”said Zhou Shuaijun at Xiangcai Securities. “A lot of investors will choose to buy open-ended funds as they are more liquid, low-risk and prudent products and have good earning prospects.”
Liu Chuankui at Ping'an Securities believed open-ended funds would give a boost to China's investment funds.
However, some experts also expressed worries about the possible negative effects new funds may exert upon the securities market during their early development stage.
“Under redemption pressure, open-ended funds might have to resort to short-term stock deals to keep their high liquidity which will amplify market fluctuations,”said Zhang Wenkui, an economist from the Development Research Centre under the State Council.
Some experts also worried that open-ended funds could possibly be used to manipulate share prices.
Hua'an Fund Management Company
SET up in June 1998 under the sponsorship of the Shanghai International Trust and Investment Company and four brokerages, The Hua'an Fund Management Company is one of the best performing of China's ten closed-end mutual fund management companies.
It now runs four close-ended funds with combined net assets of nine billion yuan as of March 23.
Hua'an has made a name for itself in the domestic fund industry for the high growth rate of the funds under its management. Two of its funds ranked first and third in terms of net assets per unit as of March 23.
It announced a tie-up with the fund management arm of Jardine Fleming in Hong Kong last year, a move that could lead to the establishment of a joint venture fund management company when China joins the World Trade Organization. Under the co-operation accord signed between the two, Fleming has advised Hua'an on setting up the open-ended fund.
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