Following the new programme of state-owned enterprise reform announced at September's 15th Communist Party Congress, China's State Council has approved regulations for establishing unit trusts. The move to create a fund management industry in China is being made to increase institutional in-vestment and fund the reform of the state sector. It is expected that the regulations will allow for open-ended funds which will give investors the opportunity to cash in their positions at any time.
The introduction of mutual funds is the inevitable complement to Jiang Zemin's pledge to float more state assets. The planned 'diversification of ownership' through a share system raised the quota for new issues in 1998 to Yn50bn (US$6bn) from 'this year's Yn30bn. The funds will target individuals as their main investors in order to harness the estimated total of nearly Yn4,000bn in private savings.
The new rules are expected to require fund management firms to invest up to 80 per cent of their funds in domestic securities to help breathe new life into state firms. Most of the funds would be restricted to share and debt markets. Analysts expect the new rules to bring the operation of China's fund industry closer to international norms.
The government's actions are being welcomed by broker-ages and others involved in China's stock exchanges. They believe that, in the long term, increased institutional investment will help stabilise the speculative and volatile Shenzhen and Shanghai markets. Presently these markets are dominated by retail investors, who in general make shorter-term investments and often take greater risks. It is hoped that the .mutual funds will address low liquidity, high volatility and a general lack of transparency, three main concerns about China's stock markets.
Moreover, provincial authorities are taking steps to establish mutual funds. Guangdong has recently applied to the central government to set up securities investment funds and officials have urged the China Securities Regulatory Commission to allow the establishment of Sinoforeign joint venture investment funds.
There are more than 80 closed-end mutual funds already operating in China, but they are comparatively weak and few are officially sanctioned by the central government. They presently have a combined investment capital of approximately Yn8bn, compared with the Ynl,640bnworth of stocks traded on China's two stock exchanges. Because the scale of these funds is small, they have not been able to stabilise the stock markets. Without regulations to govern the industry, many ofthe existing funds are not standardised and are plagued by poor management.
Beijing has announced a new set of measures, entitled Provisional Measures for Syndicated Loans, which will strictly regulate the approval process and application procedures for syndicated loans. Syndicated loans, which are often long-term and involve a large amount of capital, account for as much as 30 per cent of all international financing. China's central bank, the People's Bank of China, hopes that they will form a popular option for the financing of large infrastructure projects and state businesses in the newly regulated financial environment.
A PBOC spokesman has said that the measures will bring the banking industry closer in line with international norms. In fact, they can be seen as another means to regulate the reform of China's state-owned sectors. Syndicated loans will be needed as an alternative to capital-raising exercises to help meet long-term capital needs of large and medium-sized state firms and key development projects. In line with this aim, the spokes man added that the use of such loans for imports and investment in saturated sectors will be strictly prohibited.
The measures address such issues as the loan application process, standard fees and interest rates, and how they can be used. At the moment syndicated loans are quite common in China, but often occur without necessary approvals from government authorities.
Apart from domestic banks and financial institutions, foreign banks with the appropriate licence to engage in the domestic currency business will also be able to extend syndicated loans. The regulations allow for loans to be made in yuan or foreign currencies.
Freshfields is an international law firm. Most of its offices across Asia, Europe and North America include China specialists. For further details, telephone Matthew Cosans at Freshfields' offices in Hong Kong, (852) 2846 3400 or Beijing, (86) 10 6410 6338.
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