Chinese authorities appear to be headed toward building a pension fund industry in which mutual funds will play a part, but there appears to be little room for foreign companies to enjoy opportunities there.
Regulators in the People's Republic of China are preparing regulations to govern a domestic mutual fund industry.
Rules governing wholly domestic fund management companies and joint ventures with foreign participation are believed to be circulating for comment among government ministries and agencies and are expected to be published by the end of the year for the first set and possibly by the beginning of 1997 for those on foreign participation.
Currently, about 70 closed-end funds exist in China and no open-end funds. They total about 5 billion renminbi (U.S.$600 million) More than 50 are listed, some on the Shanghai or Shenzhen stock exchanges and some on local fund exchanges. There appear to be only 65 fund managers in China, according to members of the Hong Kong Investment Funds Association who met with Chinese leaders in August. Eighty percent of the sponsors of the 70 funds are securities firms. Most funds were established between 1992 and 1993, just before China's economic austerity program was imposed. Only four of the 70 are authorized by the People's Bank of China's headquarters in Beijing.
The regulators aim to provide a mechanism whereby all can be approved.
In August, a delegation of the HKIFA members met with leaders of the People's Bank, the China Securities Regulatory Commission, other state agencies, and, most significantly, Vice Premier Zhu Rongji. The Hong Kong delegation's purpose was to advise Chinese authorities on training programs they could provide for mainland officials working under the anticipated regulatory framework. Members of the Chinese government briefed the delegation on the government's effort to craft rules to govern both domestic fund managers and joint ventures with foreign participation. However, what degree of foreign participation will be permitted and when these joint ventures will be allowed is unknown.
"Initially maybe only one or two foreign (joint venture) managed companies will be approved. They will want to introduce this gradually to observe impact. They are proceeding carefully and cautiously because the domestic capital market is very small in China and they fear if they allow a complete opening it would cause chaos or problems," said Andrew Lo, HKIFA chairman and managing director of INVESCO Asia Ltd., Hong Kong.
A pilot project involving a foreign joint venture partner will be launched after the final rules are published.
Mr. Lo believed many foreign fund managers would like to be considered for this project but the means for applying are not known.
He said the funds now available in China are quite successful, most of them trading at a premium to net asset value. They invest directly in non-listed companies, real estate, bonds and, to a lesser extent, equities. Investors are individual savers and all resident Chinese citizens.
"In China, there are very few alternatives available for investment besides bank deposits and a bit of shares. So these funds serve a purpose," Mr. Lo said. The funds are not open to foreign investors.
Personal deposits in mainland banks average 40% of personal income. Meanwhile, China's foreign exchange reserves top US$80 billion, the third largest in the world, and are anticipated to reach $100 billion by next year. The Chinese authorities are aware their capital markets are illiquid and underdeveloped, considering their small size compared to the sum of savings. In China, as is typical of markets in other newly industrializing nations, the bond markets are larger than the equity markets.
"The (People's Bank) recognizes the need for facilities to mobilize personal savings. They repeated to us that they do not see the need to attract foreign money into China as important as the need to mobilize internal resources," said Stewart Aldcroft, marketing and sales director, Templeton Franklin Investment Services (Asia) Ltd., Hong Kong, another HKIFA delegate on the August trip. He was pessimistic about the prospects for wholly foreign-owned fund management companies in China.
The domestic fund management companies the Chinese government wants to encourage will be independent. The authorities do not want fund management companies to be subsidiaries of banks or securities firms because authorities want to avoid a situation in which, for instance, the China Securities Regulatory Commission must be involved with regulators of other areas, Mr. Aldcroft explained. He added that it was his impression that the mainland authorities are keen to develop mutual funds because they want the majority of investors in securities to be deflected from investing directly in equities.
Mr. Aldcroft observed China needed to begin talking about the development of a pension fund industry. There are few pension funds in China and those that exist invest mostly in government bonds but with interest rates softening, yields are coming down. "So they eventually will have to have equities available," he said.
Chris Russell, director, Jardine Fleming Holdings Ltd., said China sees pension reform as resting on three tiers: state, enterprise and personal. It appears the state level will employ a "pay-as-you-go" approach, while the enterprise and personal levels will entail a funded approach. The personal level "would naturally involve mutual funds," he said. He speculated the first authorized unit trust would be a bond or money market fund.
Mr. Russell added the Chinese government has shown concern about the capitalization of fund management companies. Besides capitalization, the authorities are "paranoiac" about the loss of capital as a result of big inflows and outflows of foreign money, he said.
Delegates to the August meeting said mainland regulators were "horrified" by Mexico's crash of recent history and the subsequent outflow of foreign money. Yet they were quite inquisitive about the experience in India where the central bank is the lender of last resort to the state unit trust agency.