The China Securities Regulatory Commission (CSRC) released a long-expected regulation on monetary market funds yesterday.

It is the first time that regulators have set up guidelines for such funds, which enable fund managers to enter the monetary market, and clarified their investment sphere.

As designed, a monetary market fund can only invest in short-term deposit certificates, bonds, bond repurchases, central bank bills and other permitted monetary market tools that have good liquidity.

They are prohibited from investing in stocks, convertible bonds, low-rating corporate bonds and long-term bonds.

A monetary market fund is regarded as a major innovation in China's fund industry.

Compared to equity funds, they often involve lower risks in investment due to their inherent characteristics.

Seven domestic fund management companies, including China Asset Management Co and China Merchants Fund Management Co, have issued funds targetting monetary market investment tools since last year.

But without comprehensive standards for the product, it has been hard for regulators to regulate the sector.

An official with China Asset Management said that the company had been expecting the release of the new rule, which formally acknowledged the legal status of such funds and made it easier for fund managers to follow the policies.

Before that, none of the fund managers put the term "monetary market fund" in their products.

Investing in a monetary market fund is a good choice while the stock market is at a downturn, said Yue Ke, an analyst with Haitong Securities.

The monetary market is basically not affected by fluctuations in the bourses, so it can help investors avoid market risks.

And unlike bond funds, monetary market funds normally have their yields move in the same direction as the interest rate, so it is a good time to buy now, Yue said.

Last week, monetary market funds outperformed other funds in China, as the stock market tumbled and many equity funds shrank.

All of them reported more than 2 per cent of annualized yields during the week.

(China Daily September 1, 2004)