China's overheated mutual fund sales, boosted by a public mania for investing in A shares, is expected to cool down after securities regulators sent out a warning of potential risks that might occur due to excessive money inflow into the market.

The tightening, however, is not likely to have a major impact on market sentiment, experts pointed out.

The China Securities Regulatory Commission (CSRC) has stopped processing applications for new funds to invest in the stock market. Meanwhile, the securities regulator on Monday issued a notice to urge the mutual fund industry to strengthen their risk management when profit taking in a bullish market.

According to industry insiders, CSRC is likely to resume the approval of new funds in January.

"I heard the regulator had slowed down the approval of new funds into the market," said Huang Hui, a compliance officer with Shenzhen-based First State Cinda Fund Management Co Ltd. "But we are still doing our daily work and hopefully our fund could be launched in January."

First State Cinda, a joint venture between China Cinda Asset Management and Australian-based First State Investment, had planned to launch its fund in October.

"We should not only focus on the numbers, but also the quality (of those funds)," an official with CSRC said yesterday.

The CSRC's Monday notice had warned fund management companies to not only pursue the volume of the asset under management, but also to pay attention to potential risks in order to ensure the industry is in a healthy condition.

The Shanghai-based Wind Statistics shows that 21 mutual funds raised a total of 136.7 billion yuan (US$17.3 billion) to invest in the stock market since October. Most of the new funds had been invested in the stock market to buy a combined total of 40 billion yuan (US$5.06) A shares in October and November.

On the plus side, China's overheated fund raising has ushered in a golden time for banks to develop their intermediate businesses.

"It is our best time in history since Chinese banks are allowed to provide custodian services for various funds in1998," said Ding Fuli, an assistant general manager from the Bank of China's Head Office Custody & Investor Services Department. Bank of China is currently the custodian bank of 40 mutual funds.

"We respect CSRC's warning of better risk management on fund raising. As custodians, we will be strict with selecting fund companies as our clients," Ding said. "Only those companies that have good performance and strong ability to control risks can be our customers."

According to First State Cinda's Huang, medium-sized and small fund management companies are encountering a tough time as the fund companies are competing for limited custodian bank resources.

"The finding of a custodian is very strenuous work, and since banks have the bargaining power, sometimes we have to increase payments to the bank," Huang said.

Yet, the recently raised mutual funds have accounted for only a small fraction of new money entering the market, and the cooling measure is not likely to have a major impact on market sentiment.

The benchmark Shanghai stock index yesterday closed with almost no change after rising to within a whisker of its all-time high.

"The cooling down of fund raising activities will surely have an influence on the market, but it is hard to say how big it will be," said Zhang Qi, an analyst with Haitong Securities.

(China Daily December 14, 2006)