China is expected to issue a regulation on the launch of fund management companies by commercial banks within the year and then allow a few pilot banks to try the new business together with foreign strategic investors.

Zhang Yuan, director of the policy and regulation department of the China Banking Regulatory Commission, said yesterday in Beijing that the experiment is expected to bring new profit sources for banks, whose income now largely comes from the interest rate gap between loans and deposits.

Regulators are supportive of the move and are designing detailed regulations in this respect, which should be introduced within the year, said Zhang.

That will pave the way for some pilot banks to invest in the fund industry and issue their own mutual funds. Banks currently only act as sales agents or custodians for such funds.

But Zhang added that any interested bank must find a foreign institution as the strategic investor in the fund business, although other domestic institutions can also invest.

Zhang made the remarks at a high-level forum held by China Merchants Bank yesterday, which gathered senior officials from the banking, securities and insurance watchdogs and relevant companies to discuss the topic.

The banking sector's intention to join the core part of the fund management business has attracted growing attention and enhanced the expectations for the reform of the segregated regulatory scheme of the banking, insurance and securities industries.

The approval of the State Council to let pilot commercial banks invest in or launch fund management companies cleared the major legal obstacles, said Wu Xiaoling, vice-governor of the People's Bank of China, the nation's central bank.

But the related departments are still to discuss the feasible model for the innovation, including equity structure, risk control and types of fund products to be introduced.

Wu also said that banks can either directly invest in the fund business or indirectly invest through a subsidiary or an affiliate. Both models should be tried, she said.

And in terms of market orientation, fund management companies launched by banks should first start with the development of monetary market funds and bond funds, in which banks have rich expertise, Wu said.

Eager to get the first batch of licenses, some domestic banks have already submitted initial proposals to do the new business.

"We are waiting for the issue of relevant regulation to finalize our proposal and forward it for approval," Ma Weihua, president of Shenzhen-based China Merchants Bank, told China Daily on the sidelines of the forum yesterday.

"We will seek co-operation from foreign institutions," he said.

Ma also said that the exact model of investing in the fund business is not yet set. It may launch a new company with its partners or acquire an existing fund management company.

The final choice depends on which way is faster, he said.

The Industrial and Commercial Bank of China (ICBC), one of the big State-owned banks in China, also has a similar plan.

Yang Kaisheng, vice-president of the ICBC, said yesterday that the bank is also actively preparing to join the fund business, though it still hopes to see clearer standards and procedures in the first place.

The new business will enrich the profit sources of the banks and investment channels for the public.

And as many medium and large-sized banks have overseas subsidiaries, their interaction with overseas institutions can introduce fresh expertise and competition, which is good for the healthy growth of the overall fund industry, Yang said.

However, experts also warned that several issues first have to be resolved to prevent financial risks once the gates open.

How to separate the assets intended for fund management and the assets of the traditional banking business is a major concern.

It is suggested a firewall is established between the two types of assets and relevant risk control mechanisms be designed to monitor affiliated trades, fund custody and financing towards the fund companies.

Such issues will also be covered in the expected new regulation by the banking watchdog.

(China Daily November 11, 2004)