More than 600 billion yuan (US$72.5 billion) of private investment funds is believed to be circulating in securities trading in China, an academic report claims.

The paper, released by the Central University of Finance and Economics, is based on investigations into the scale and impact of private investment funds in ten Chinese cities.

It said that such privately-raised investment funds produce about 30-35 percent of the transactions in China's stock market and has become an important force for investors in the bourses.

Such funds are initiated by an individual or an investment company and are raised privately by a few rich investors. The more common but less lucrative option besides these private funds is securities investment funds launched by licensed fund management companies and issued to the general public.

The purchase and redemption of these private funds are often made through private negotiation.

So far, these funds are still in a grey area of legislation and supervision.

Chinese law does not explicitly allow individuals or unlicensed institutions to launch private funds, but with a growing number of rich people collecting a large amount of idle funds and limited legal investment channels, such funds have become popular, especially in the southern and coastal regions.

Instead of creating obstacles to the development of this funding force, some experts say it would be better to regulate it with efficient laws and rules and make better use of the funds to boost the economy.

Xia Bin, director of the Research Institute of Finance of the State Council's Development and Research Center, said that legislation concerning private investment funds should have been introduced long ago.

The expansion of such funds has growing momentum, but without explicit rules and laws to regulate the sector, it could spill over into illegal financial activities and stock price manipulation, he said.

When these funds are legalized and put under public supervision, they boost the competition in and the development of the overall fund industry in China, said Wang Lianzhou, a renowned expert in the fund industry and one of the drafters of China's Securities Investment Fund Law.

That law, enacted in June and the first in China, however, does not cover private investment funds.

Wang said legislators had planned to include the sector in the fund law, but finally gave up the idea.

So a special law or regulation will be required to regulate private funds, he said.

Presently, the clients of these funds are mostly rich people or institutions, so the number of participants is still limited.

The profit however can be very attractive and that has attracted lawful investment firms, like securities houses.

Over the past two years, some of them launched investment projects to a limited group of clients via the network of banks, with similar structure and features to private funds.

But as such products prevailed in the country, regulators also sensed the risk - some companies exaggerated the returns of the projects to attract more customers and ignored potential risks.

The banking and securities watchdogs therefore exerted a ban on these products early last year, drafting regulations to set up standards in the business before re-opening the gate.

A high threshold would be set up for market entry to launch such investment products to avoid risks.

A few securities houses are expected to be chosen as pilots for the experiment in the near term, insiders said.

The whole process should be market-driven and competition should be encouraged, said Xia.

The fund managers have to build up their reputation and creditability to win more customers. Those who breach agreement would be punished by the market rules, he said.

(China Daily August 9,  2004)