China Securities Regulatory Commission (CSRC) issued a notice on Sunday, urging fund companies to avoid blind expansion and forbidding them from misleading consumers in marketing or engaging in speculative investment.

The second notice this year aimed specifically at fund companies requires domestic funds to strengthen risk controls in liquidity management and to bear in mind the concept of value investment.

The document said that fund firms and their employees should "exercise due diligence and make objective and reasonable public comments on investment."

Fund firms have been ordered not to expand the scale of their funds six months after the day they issue statements or start promotions for the issuance of new products.

General Manager Sun Zhichen with the Principal Asset Management Co. Ltd. of China Construction Bank said that the move was "a rational and natural decision" of the supervisors in an effort to curb market risks.

As fund firms currently run more than one-third of the negotiable market valuation of the mainland bourse, Sun said that the notice indicated the CSRC would rein in new issuances and push fund firms to optimize their investing capability and liquidity management.

Latest figures from the CSRC showed that the aggregate equity of China's funds has shot up by nearly 10 percent in more than one month to 3.312 trillion yuan (about US$444 billion) by the end of October, almost quadrupling the figure in the beginning of the year.

Although no new funds have been issued since Sept. 21, the combined scale of China's 341 funds run by 59 firms has grown by 9.56 percent or 159.1 billion shares to 2.055 trillion shares by the end of October, nearly 2.8 times as much as that in the beginning of the year.

Industry analysts attributed the rapid expansion of fund scale to the enthusiastic participation of individual investors.

The third-quarter survey on household clients in cities and townships by the People's Bank of China showed funds have taken up 25.4 percent of household financial assets, up by 5.4 percentage points over the second quarter.

Another report by the Galaxy Securities Funds Research Center identified funds as the most rapidly growing financial sector because assets have grown by 65 percent annually between 2003 and 2006, leaving insurance far behind at 32 percent and banking deposits at 15 percent.

Sources with the CSRC said that the fund industry is enjoying healthy growth on the whole but there are new phenomena worthy of notice. For instance, some fund companies carry out unjust competition by not fully revealing investment risks, some ignore liquidity risks to go after better ratings and short-term returns, while some fund managers engage in short swing trading or make improper comments on individual shares.

As open-ended funds are very susceptible to redemption, the CSRC warned of blind optimism amidst fund firms and urged them to tighten liquidity management.

To better protect the long-term interests of fund holders, the CSRC said it would evaluate fund firms on their human resources, investment research capability, operation system management, customer services, risk management, and internal control.

Third quarterly reports of fund firms showed that ten funds including Bosera Funds, China Asset Management, China Southern Fund Management and E Fund Management have each held assets of more than 100 billion yuan (about US$13.4 billion). In the second quarter, there were only five.

(Xinhua News Agency November 5, 2007)