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Overhaul of fund regulations looms in China

From Asian Investor comes the news that in October, China’s National People’s Congress will review a substantial reform of the fund laws proposed by the China Securities Regulatory Commission (CSRC).
Less than six months after taking charge of the fund supervisory division at the CSRC, the new director-general Wu Qing is already making his presence felt in the industry.

Under Wu’s leadership, the division has recently submitted a proposal to the National People’s Congress (NPC) advocating a serious overhaul to the regulations controlling the Rmb2 trillion ($292.8 billion) fund industry in China. On July 6, the NPC called the first financial committee meeting to review the suggested rule changes.

Prior to taking up his role at the fund division, Wu was best known as a ‘risk hawk’ responsible for cleaning up bankrupt securities firms. He was involved in drafting China’s first set of risk disposal rules for the brokerage industry.

Hubert Tse, managing director and head of the international business group at Yuan Tai PRC Attorneys in Shanghai, says depending on the political will and consensus to be gathered at the NPC level, the regulatory review could either result in minor tweaking to the existing securities investment rules, covering issues such as investor protection, fund manager compensation and trading restrictions; or it could be a major overhaul, changing the way the investment industry is regulated in China.

If fully passed, the CSRC will see its regulatory power expand to cover the private fund industry in China. Tse believes the move will be the CSRC’s most forceful attempt yet to create a level playing field between private and mutual funds, and ensure stability in the functioning of the capital markets.

The NPC is expected to vote on the matter in the coming annual gathering in October. If passed, the changes would be implemented by March 2010 at the earliest.

Currently, private funds are not regulated and have benefitted from operating opaque investment structures. They also rob the mutual fund sector of talent; at one point in 2007, private funds were said to be responsible for a 30% turnover in investment staff in the mutual fund sector.

One of the most feted private fund operator is Lv Jun, a former CIO and star manager at China International Fund Management, J.P. Morgan’s asset management joint venture in Shanghai. Lv has since banded with Chung Man-Wing, a former MD at JF Asset Management in Hong Kong and Peter Tang, a portfolio manager in charge of JF’s Taiwan portfolio in founding their Greater China fund.

In 2009, against a background of strong market momentum in the A-share market, private funds have re-emerged as a serious threat to the stability in the mutual fund industry. These funds have handed out handsome perks to lure fund managers who are otherwise attracted to the lack of disclosure in these funds’ daily dealings. Observers have also blamed private funds for creating excessive volatility in the market.

The CSRC has made several attempts to protect the mutual fund industry from private fund threats. It has approved various new lines of business that help the industry to gain ground on the private fund sector.

Further to the segregated mandate business it approved in 2008, it has recently permitted general partnership arrangements in which fund houses can raise funds through quasi-hedge fund setups. Fund houses can tailor-make aggressive investment products specific to clients without disclosing activities in these portfolios to third parties.

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China: the risk of Selling Foreign Exchange Derivatives Under Control

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The People’s Bank of China, the central bank, recently made an investigation on derivatives operation of six domestic commercial lenders.

They included Industrial and Commercial Bank of China (ICBC, SHSE: 601398, and SEHK: 1398), Agricultural Bank of China (ABC), Bank of China (BoC, SEHK: 3988 and SHSE: 601988), China Construction Bank (CCB, SHSE: 601939, and SEHK: 0939), Bank of Communications (BoCom, SEHK: 3328 and SHSE: 601328) and China Development Bank (CDB). Such investigation actually has been made by the China Banking Regulatory Commission (CBRC), the top Chinese banking regulator, and the conclusion it reached is that the risk for commercial banks to sell foreign exchange derivatives is under control, revealed an insider.

Currently, foreign exchange derivatives sold in the country include foreign exchange option, foreign currency swap, foreign exchange interest swap and etc. The floating losses commercial banks suffer from selling such products has dropped to different extents thanks to rebound of the global market and importance they attached to downsizing such business. Statistics show that such business’ notional principal amounts of the nation’s Big Four state-owned commercial banks
, including ICBC, ABC, BoC and CCB, each has slid abut 50 percent since the fourth quarter of last year.

In addition, they lowered the proportion of complicated structural products in succession. Complicated structural products are always designed by foreign banks and faire value accounting of those products is also provided by them. They have become two big obstacles on the way of the growth of their Chinese partners’ derivatives business.

In order to reduce risk, Chinese companies have no choice but to buy foreign exchange derivatives. The pricing right is tightly controlled by foreign banks despite that the products are sold by their Chinese partners. As a result, a considerable part of the profit those Chinese banks gained from the business is taken by foreign banks.

Foreign banks know little about Chinese companies, so they prefer to sell products to the latter via Chinese banks. Those Chinese banks have to loan money to buyers of such products provided that loss takes place. Under such environment, those Chinese banks will be under rising credit risk. And the best way for them to solve the problem is to ask buyers of such products to pay deposits, added the insider.
with Trading Markets

Filed under: china, derivative, , , , , , , , , , , , , , , ,