The correction of the stock market under tighter credit supply has hit the initial public offerings (IPOs) of mutual funds in China hard over the past two months. But fund managers are still expecting a turnaround as they seek rescue through innovation and other means.

Since May, fund managers have found it difficult to sell equity funds, a sharp contrast to the first four months, when a bull run of the bourses fuelled a flood of fund IPOs and saw more than 90 billion fund units sold out.

In the latest attempted mutual fund offerings, most funds have only realized an IPO scale of 1-2 billion units, or even less. This is one-third of the size of funds issued earlier in the year.

"This round of macro economic controls has had a big impact on the bourses, especially on the large-caps. The market correction will continue for some time as the present macro policies will hold on," said Wang Yawei, investment director of the Beijing-based China Asset Management Co.

China's stock market tumbled as the authorities took a series of macro economic management measures to curb excessive lending and investments in some sectors, and cool the economy.

The benchmark Shanghai composite index was almost 20 percent down from early April.

"Obviously it will be more difficult to sell mutual funds than before, though the pace of fund IPOs has not slowed," said Yang Liu, deputy general manager of the Bank of China's fund custody department.

The bank will be selling another equity fund, a large-cap focused fund by China Asset Management Co, next month.

Yinhua Fund Management Co will also issue an index fund soon.

Yang said that the recent market consolidation has also absorbed some investment risk and may actually offer fund managers more opportunities as stock prices are much lower.

It is normal to see the scale of mutual fund IPOs shrink when the bourses move down, said Du Shuming, a senior researcher with China Galaxy Securities.

The investment value of the blue chips is more based on the medium and long-term, Du said.

The market correction will ultimately promote the restructuring of many industries and the smaller and poor-performing companies will be kicked out while the larger and stronger ones will benefit, said Wang Yawei.

"But we do have to be more careful in stock picks and enhance risk control," he said.

Meanwhile, some fund management companies are innovating as a way to scatter risk.

Some are developing new fund products with a wider portfolio range. Some are adjusting marketing and research strategies in accordance with the macro economic trend.

Yinhua, for example, has more researchers studying the macro economic situation and closely tracing relevant indices, company sources said.

China Asset Management is also working together with the Shanghai Stock Exchange to develop China's first exchange traded fund (ETF) and relevant trading rules.

(China Daily June 28, 2004)