China's fund market is experiencing a rapid growth, but analysts caution it is dangerous to simply focus on business expansion before regulation and investment avenues are further improved.

With February 16's issuing of guarantee funds by Yinhua Fund Management Co, as many as eight mutual funds will be up for sale in China over the next two weeks.

Yinhua's new fund is the nation's first guarantee fund, which, providing guarantee for the safety of the principal for buyers over a three-year investment period, offers a new choice for conservative investors unwilling to shoulder the risks in investments like stock trading.

Yinhua has set a target of selling 6 billion yuan (US$724.6 million) of the fund and already realized a 400 million yuan (US$48.3 million) of sales by noon Monday, company sources said. But it may have to compete with other fund managers in the next few days.

A monetary market fund, an index fund and two equity funds are also expected to go up for sale this week, which, in addition to another three mutual funds already in issuance and Yinhua's guarantee fund, will bring the total number of available funds to eight.

"That will be a big boom for fund managers," said Wang Lianzhou, one of the drafters of China's first Securities Investment Fund Law and a former member of the Financial and Economic Committee of the National People's Congress.

"Fund market supply seems to be very sufficient in the short term, which may add up to more than 100 billion yuan (US$12 billion) altogether," said Wang, "But the potential remains enormous compared to the 11 trillion yuan (US$1.3 trillion) of savings pool in China."

"Retailers are our target customers," said Wang Hua, the fund manager of the Yinhua guarantee fund, which set a low threshold of 1,000 yuan (US$120.8) for a minimum individual purchase.

"We hope we can attract more depositors from the banks because we are following the low-risk investment concept and investors can be insured of the principal safety," he said.

A depositor said on February 16 she planned to buy the fund with 100,000 yuan (US$12,077) of her savings because the guarantee provided seems attractive and the return will hopefully be higher than deposit interest.

"I do not want to take risks in stock and bond trading. It is not easy to save all the money," she said.

Although banks may lose some of their depositors to fund managers, they are not overtly concerned about the competition. More are using the fund boom as an opportunity to increase their intermediary service income, acting as custodians and sales agents for the funds.

"Many people have certainly talked about the diverting-effect on savings by the fund issuance, but I think that is an irresistible trend with the emergence of more investment products in the market," said Tao Li, an official with the personal banking department of the China Construction Bank.

It is better to turn competitors into partners, which may ultimately bring the banks more potential customers, she said.

Moreover, it is unlikely that banks will always be able rely on interest income as a major profit source, she said.

However, Wang Lianzhou also noted that the heated fund market also has its pitfalls.

"Domestic fund managers still have a lot to do to upgrade their products and services and make them close to international standard," he said.

"It is dangerous to blindly follow trend and rapidly expand market supply before the fundamentals and existing products are improved."

Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said last week that fund managers, securities houses and futures companies will be encouraged to pace up innovation, a major driving force for the development of the securities market, but such innovation should be based on a sounder risk control mechanism and more efficient supervision.

(China Daily February 17, 2004)