China's securities regulator has denied talks of an entry of commercial banks into the fund management business because of legal obstacles and risk concerns.

Hong Lei, deputy director of the fund supervisory department of China Securities Regulatory Commission (CSRC), said that it would be unlikely for commercial banks in China to invest in the fund management companies in the near future.

Since China is still practising a segregated regulatory scheme in banking, securities and insurance industries, the three are prohibited from making cross-industry investments.

"So if Chinese banks want to invest in the companies, it will require the amendment of relevant restrictions in law, such as the Securities Law and the Commercial Banking Law," Hong told China Daily.

It has been reported recently that banking authorities are planning to let pilot banks become the initiators of fund management firms. Some even said that the experiment would begin shortly.

Hong said that before the legal amendment and consensus of all relevant departments, no concrete progress would be made in the area.

Opinions are split on the proposed reform.

Commercial banks are already handling mutual fund sales and custody. If they can also take part in investment, they would control the entire chain of the fund business, which may brew systematic risks, said Hong.

That is also a major concern for securities regulators, who put emphasis on controlling the risks in the operation of the securities businesses.

The proposal of letting banks to take part in the asset management business, made years ago, was spot-lighted again recently by Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC), the banking watchdog.

Liu said in April that CBRC was studying the issue of allowing commercial banks to launch fund management companies, though he did not give a timetable or details of the proposal.

Obviously, the idea is a good one for banks, said Xia Bin, director of the Financial Research Institute of the Development and Research Centre of the State Council.

Asset management is a very lucrative business and should bring higher returns for banks than loans, he said.

It will also enable the banks to take part in the securities business in an indirect way.

However, an official with the fund custody department of the Bank of China said that so far, the matter is still only a proposal by the banking watchdog and the bank itself had not heard of more concrete moves or policy changes.

"We certainly have sufficient expertise in the fund management business. We have been doing fund custody and sales and business is good," he said. "So if policy allows, it should not be much of a problem for us to implement."

China's fund industry witnessed a boom of mutual fund initial public offerings in the first four months of this year, with more than 90 billion fund units sold out. That brought good business to fund managers and diverted many funds from bank deposits.

It also highlighted the market potential of the asset management business in China, which also attracted many foreign investors and caused domestic banks to fidget.

But if the proposed entry of commercial banks into investment business would widen their profit sources, experts also ask whether it is fair for bank depositors to shoulder the risk of investment.

Now depositors can benefit from competition among fund managers. They take the initiative in choosing whether to enter the bourses or not and which fund to invest in, said CSRC's Hong Lei.

But if banks also invest in the fund management business, it means that the bank deposits will flow to the bourses directly and be exposed to investment risks.

And depositors will not actually have much choice.

Therefore, a prerequisite for reform is sounder regulation and legislation, Hong said.

He also said that CSRC has communicated with CBRC and presented the pros and cons of the proposal.

"I think it is better currently for banks to focus on the fund sales and custody business instead of the investment itself," he said.

(China Daily September 6, 2004)