China's funds industry is in its infancy. Since the introduction
of the regulated funds regime by the China Securities Regulatory
Commission ("CSRC") in 1997/98, China has experienced
an unprecedented growth in its funds industry, as shown in
the diagram below.
Investment funds play a key role in the Chinese Government's
economic reforms. They provide diversification in investments
and, professionally managed, they help to foster stability
in the securities markets and better corporate governance
in the country, albeit there is room for improvement. Investment
funds also serve as the vehicles for channelling China's vast
pool of private savings into reforming State Owned Enterprises
Latterly, investments funds are playing an increasingly crucial
role in the Chinese Government's social security reform in
shifting the responsibility for providing old age pensions
from one pillar (state) to three pillars (state, employer,
Regulated funds in China come in two forms, namely closed-ended
and open-ended funds, and presently can only invest in local
listed or permitted securities. Investments in regulated funds are restricted
to the local population, although the Qualified Foreign Institutional
Investor ("QFII") regime allows foreign investors
limited access into the market.
The fund industry has been regulated by the CSRC in accordance
with its provisional fund regulations until the enactment
of the Securities Investment Fund Law in October 2003 that
sets out the legal framework for fund regulations in the future.
The CSRC is taking a progressive view of fund regulations
and is keen to introduce internationally accepted good practices
into the country. The CSRC has established memoranda of understanding.
When doing this, it co-operated with regulatory bodies in
many jurisdictions, including Hong Kong's Securities and Futures
Commission ("SFC"), the Securities and Exchanges
Commission ("SEC") in the US and the Financial Services
Authority ("FSA") in the UK.
China's funds industry currently consists of 25 competitive
but profitable standalone local and eight Sino-foreign Joint
Venture ("JV") Fund Management Companies ("FMCs")
providing a fairly homogeneous set of investment funds to
the general public. The number of licensed FMCs is expected
to double over the next twelve to eighteen months.
There are currently nine FMCs that are expecting approval
by the CSRC. The recent growth of the market is attributable
to the issuance of sub-funds of umbrella funds. There are
currently nine umbrella funds proposing 24 sub-funds.
Higher profitability can be achieved through being the first
to introduce new and innovative fund products such as the
recent launches in money market funds. Generally, however,
above-normal returns are short-lived as others will quickly
get onto the bandwagon. Nevertheless, the size of the above
average return makes it worthwhile to invest in product development
and be the first to launch new funds.
Local talent is in short supply resulting in intense competition
amongst FMCs. Sino-foreign Joint Venture FMCs fair better
as the foreign partners are able to contribute technical assistance
and personnel on the ground to compensate for shortages in
With domestic reforms occurring on many fronts and the desire
to be an engaging partner internationally, China is going
through an interesting time. The ability of its funds industry
to innovate and respond to China's economic reforms is seen
by many as a key driver in growing China's fund industry.
PwC believes that China's fund industry will continue to
experience double-digit growth in the foreseeable future.
Furthermore, since China joined the WTO in November 2001,
we are seeing and working with an increasing number of foreign
institutions entering the market principally through forming
joint venture fund management companies with local Chinese
business partners. We expect this positive trend to continue.
The signs are good for China to develop a successful funds
industry. However, success will only come to those who continue