The passing of China's first law on the securities investment fund industry has set new standards and a regulatory framework for the fast-developing business, yet industrial experts say the law still leaves many aspects uncovered and expect follow-up reform policies.

China's top legislators passed the Law on Securities Investment Funds on Tuesday, the last day of the week-long fifth session of the Standing Committee of the National People's Congress (NPC).

That temporarily ended dissension in the legislative body on the draft, which incorporated many amendments since 1999.

The law formally acknowledges the function and role of securities investment funds, frames the regulatory system, sets the market entry threshold and specifies the liabilities of the practitioners, said Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), China's securities watchdog.

"All these lay a solid foundation for the development of the securities investment fund industry," said Shang, "And with the standards and liabilities clarified, it will also boost investor confidence and enhance supervision."

The new law, which will take effect on June 1, 2004, stipulates the qualification of practitioners in fund management companies, blocking out those who have committed economic crimes such as bribery, or those have taken on heavy debts that cannot be paid back duly. Senior managerial staff responsible for bankruptcy or closure of companies and enterprises are also forbidden to enter the business for five years.

Those who misuse client funds or illegally launch investment funds will not only face administrative punishment but also criminal charges.

"It is rare to have a specialized law for a certain investment sector," said Wang Lianzhou, former head of the law-drafting panel.

Originally, the drafting panel wanted to make a comprehensive law on the overall investment fund industry, which would also cover venture capital and industry funds.

But differences among government departments delayed the legislative process and it was hard to strike a consensus.

"So we had to give up the original plan and it was suggested that a more specified law be drafted," said Wang.

However, that also leaves a large number of issues in the fund industry undressed. Apart from funds that target securities investment, many other types of investment funds have been operating in a gray area, which easily brews irregularities.

Even for the securities investment fund business, the new law fails to touch on some crucial points, such as whether open-ended funds can acquire short-term loan from banks.

An official with China Assets Management Co said the loan proposal, which would have boosted cash flow and fund adequacy of fund managers, had been widely expected; and was disappointed that it was not included.

Yi Xianrong, a researcher with the Chinese Academy of Social Sciences, said that the new law confers the right of interpretation of some terms and issues to related government departments, which may put ordinary investors in a disadvantageous position in case of disputes.

At the end of September, China had 32 fund management companies, which had issued 87 investment funds, including 33 open-ended funds.

The net asset value of the funds totaled 155.3 billion yuan (US$18.8 billion), accounting for about 13 percent of the market capitalization of A shares.

(China Daily October 30, 2003)