Industry analysts hope Beijing's final regulations on Sino-foreign joint-venture fund management companies will remove some burdensome restrictions apparent in an earlier draft. Agreeing the hurdles may turn away small overseas fund managers, long-term observers of China's fund industry nevertheless argue that they should not deter determined multinational investors. The final regulations, to lay down rules for foreign access to a potentially huge and hitherto underdeveloped sector, are expected by the end of next month. China now has 15 licensed fund management companies managing 48 closed-end funds and three open-ended funds. Last October, 47 of the funds were managing 75 billion yuan (about HK$70.29 billion), a trifle of the Shanghai and Shenzhen stock exchanges' combined market capitalisation of 4.37 trillion yuan, and an even smaller percentage of mainlanders' huge pool of savings. Beijing pledged to allow foreign investors to own up to 33 per cent of fund management companies in China upon accession to the World Trade Organisation, rising to 49 per cent in three years. Draft rules released by the China Securities Regulatory Commission (CSRC) for public consultation last December allowed foreign investors to either acquire stakes in existing domestic fund management companies or form new joint-venture fund companies with domestic partners. However, they ruled out the marriage between existing domestic fund management companies and foreign investors to create new fund managers. Hewitt Associates chairman for Greater China Stuart Leckie, who has advised the mainland on the restructuring of its pension system, said: 'That, I think, was actually plan A for most of the foreigners.' Concerns about regulators' inexperience with such a complex structure may be behind the ban. Chinese law also requires major founding shareholders of a fund management company to be either securities firms or investment trust companies. In a country that has bred many tales of uninitiated foreign investors betrayed by their domestic partners, the banned structure could potentially give foreign investors more control over key issues such as investment management, decision-making processes, research and compliance standards. Mr Leckie said it was difficult to be anything but a passive shareholder when buying into an existing company as you could not suddenly appoint your own management. 'You can't necessarily get your own standards of compliance, auditing and procedures,' he said. A foreign fund executive said of the remaining options that complex licensing requirements meant launching a new fund firm could take months or years. Buying into existing fund management companies, deemed in some quarters as a time-saver, may prove no less challenging. Mr Leckie said: 'Some of these domestic companies are managing US$1 billion and they are very profitable. It would be very interesting to see the valuation of that.' Mainland fund managers have profited hugely from buying stocks at initial public offerings and selling them on the secondary market. The practice had been deemed a sure bet until intensifying regulatory clampdowns on rampant market irregularities depressed domestic stock prices and scaled back fund-raising since the middle of last year. To complicate matters further, mainland regulators previously limited any single shareholder to a 33 per cent equity stake in a domestic fund management company. That means any foreign investor wishing to set up a parallel structure with an existing domestic fund company's shareholders will have to haggle with multiple would-be domestic partners, possibly with divergent interests and financial strength. However, analysts caution against pessimism. Investment bank China International Capital Corp, a joint venture between China Construction Bank and Morgan Stanley, estimates the number of China's fund management companies will swell to between 20 and 25 this year, including one or two Sino-foreign joint ventures. The view, said the fund executive, was shared by the CSRC. Tony Zhang Xiaodong, a director of Sunrise Management International in Hong Kong and Mr Leckie's co-author of the book Investment Funds in China, is more optimistic: 'I estimate four to six joint-venture fund managers will spring up on a 12-month horizon.' Beijing has several practical reasons to speed up growth of the fund industry. For one, successive cuts have trimmed the one-year yuan deposit rate from 1997's 11 per cent to 1.98 per cent. The reductions have put enormous strains on domestic insurers who have been investing primarily in bank deposits and bonds. Beijing recently raised the ceiling on insurers' assets allowed to flow into equity funds from 10 per cent to 15 per cent to boost their investment returns. However, Mr Zhang said, a much lower ratio had actually been invested in equities because of the fund sector's limited capacity. Then there is the allure of managing part of the National Social Security Fund. Set up in September 2000, the fund was designed as a last resort to help plug provincial pension holes. More than 60.7 billion yuan, from central Government fiscal allocations and stock market fund-raising, have reportedly been injected into the national reserve. Beijing last year announced it would allow up to 40 per cent of the fund's holdings to be invested in stock markets. Industry sources said officials had indicated their preference of appointing joint-venture fund managers to handle the money, rather than scandal-hit domestic fund managers. Mr Zhang even saw the draft regulations' hefty paid-up capital requirement as falling in line with Beijing's intention to usher in bigger, less speculative institutional investors. Unsophisticated Chinese investors also tend to see sizeable registered capital as an indicator of a fund manager's strength and reliability. As with a 1997 rule applicable to major domestic founding shareholders, the draft document requires foreign investors to possess 300 million yuan in paid-up capital, despite a minimum capital requirement of only 10 million yuan for fund-management companies in China. The high hurdle will shut out many small Hong Kong funds. Even so, Mr Zhang said the CSRC had already received 17 applications for joint-venture fund companies. JF Funds, for instance, has long made known its intention to buy a stake in Huaan Fund Management. At least one foreign firm had been able to secure management control in a proposed joint-venture fund company with a Chinese securities firm, he said.