China's securities regulator has denied talks of an entry of commercial banks into the fund management business because of legal obstacles and risk concerns.

Hong Lei, deputy director of the Fund Supervision Department of the China Securities Regulatory Commission (CSRC), said that commercial banks in China are unlikely to invest in fund management companies in the near future.

China segregates its banking, securities and insurance industries, and the three are prohibited from cross-investment.

"So if Chinese banks want to invest in the companies, it will require amendment of laws such as the Securities Law and the Commercial Banking Law," said Hong.

Rumors have been circulating recently that the CSRC is planning to let pilot banks enter fund management operations. Some reports have indicated that the experiment would begin shortly.

Hong said that in the absence of amendment to the law and arrival at a consensus by all related organizations, no concrete progress would be made in the area.

Opinions are split on the proposed reform.

Commercial banks are already handling mutual fund sales and custody. Allowing them to control the entire chain of the fund business could create systemic risks, said Hong.

That is also a major concern for securities regulators, who emphasize risk control in the operation of the securities businesses.

The idea of allowing banks into the asset management business was first made years ago. It came back into the spotlight when Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), said in April that the CBRC was studying the issue of allowing commercial banks to launch fund management companies. He did not give a timetable or details of the proposal.

The idea is an attractive one to the banks, according to Xia Bin, director of the Financial Research Institute of the State Council's Development and Research Center. Asset management is a very lucrative business and should bring higher returns for banks than loans.

It would also enable the banks to participate indirectly in the securities business.

An official with the Fund Custody Department of the Bank of China said that his bank had not been informed of any concrete moves or policy changes.

"We certainly have sufficient expertise in the fund management business. We have been doing fund custody and sales, and business is good," he said. "So if the policy allows it, it should not be much of a problem for us to implement."

Mutual fund initial public offerings soared in the first four months of this year, with more than 90 billion fund units sold. While fund managers saw good business, it meant the diversion of money from bank deposits.

It also highlighted the market potential of the asset management business in China, which has attracted many foreign investors and caused domestic banks to fidget.

But if the proposed entry of commercial banks into the investment business would widen their profit sources, experts also ask whether it is fair for bank depositors to shoulder the risks.

Now depositors can take the initiative in choosing which fund to invest in and whether to enter the bourses at all, said CSRC's Hong Lei. But if banks also invest in the fund management business, it means that bank deposits will flow directly to the bourses and be exposed to investment risks, whether depositors like it or not.

Therefore, improved regulation and legislation are prerequisite to this type of reform, according to Hong.

He also said that the CSRC and CBRC have discussed the pros and cons of the proposal.

"I think it is better currently for banks to focus on the fund sales and custody business instead of investment itself," he said.

(China Daily September 6, 2004)