An Overview of China's Fund Industry(6)

　　8. Closed-end Funds

　　On November 11th 1997, China’s first group of closed-end funs were launched, which symbolized the birth of China’s fund industry. Four years later, two open-end funds were open to public investors on November 2001. Within a short span of two years, new fund products such as “principal guaranteed fund”; “umbrella fund” and the Money Market Fund attracted public’s attention as well as their wallets.

　　On the other hand, the closed-end funds mostly selling at deep discount were neglected by the public. Sitting on the huge number of paper loss, the heavy weight closed-end fund investors-insurance companies drummed up the debate on opening the closed-end fund. According to them, all they are asking are just net value of the fund.

Closed End Fund Discount Rate Ranking
Fund number	Fund names	Market Value(RMB)	Net value		Discount
184702	Tong Zhi	0.977	1.1388	-0.1618	-14.21%
184696	Yu Hua	0.92	1.0781	-0.1581	-14.66%
184711	Pu Hua	0.643	0.7687	-0.1257	-16.35%
184738	Tong Bao	0.747	0.8959	-0.1489	-16.62%
184708	Xing Ke	0.892	1.0704	-0.1784	-16.67%
184720	Jiu Fu	0.846	1.0163	-0.1703	-16.76%
184710	Long Yuan	0.73	0.8824	-0.1524	-17.27%
184718	Xing An	0.856	1.0416	-0.1856	-17.82%
184719	Rong Xin	0.862	1.0659	-0.2039	-19.13%
184712	Ke Hui	1.089	1.3488	-0.2598	-19.26%
184695	Jing Bo	0.758	0.9425	-0.1845	-19.58%
184713	Ke Xiang	1.014	1.2627	-0.2487	-19.70%
184709	An Jiu	0.688	0.8676	-0.1796	-20.70%
184700	Hong Fei	0.717	0.9179	-0.2009	-21.89%
184705	Yu Ze	0.865	1.1632	-0.2982	-25.64%
184703	Jin Sheng	0.771	1.0539	-0.2829	-26.84%
184706	Tian Hua	0.57	0.8539	-0.2839	-33.25%
184688	Kai Yuan	0.649	1.065	-0.416	-39.06%
184698	Tian Yuan	0.624	1.0877	-0.4637	-42.63%
184691	Jing Hong	0.529	0.9404	-0.4114	-43.75%
184722	Jiu Jia	0.601	1.0836	-0.4826	-44.54%
184721	Feng He	0.587	1.0646	-0.4776	-44.86%
184690	Tong Yi	0.575	1.043	-0.468	-44.87%
500058	Yin Feng	0.558	1.019	-0.461	-45.24%
184689	Pu Hui	0.53	0.9845	-0.4545	-46.17%
184701	Jing Fu	0.482	0.9055	-0.4235	-46.77%
184692	Yu Long	0.521	0.979	-0.458	-46.78%
184728	Hong Yang	0.511	0.9628	-0.4518	-46.93%
184693	Pu Feng	0.503	0.9502	-0.4472	-47.06%
184699	Tong Sheng	0.49	0.9379	-0.4479	-47.76%
Ending Date: 2005-09-16

　　Since July of 2005, 54 closed end funds showed strong momentum of upward swing. According to an observation by a fund analyst at China Galaxy Securities Co, the total net value of the 54 closed-end funds on June 24th is 9.6 billion USD, but their market value was at 5.7 billion USD. However, their net value and market value reached 9.7 billion USD and 6 billion USD respectively on July 30th. The one-month market value appreciation surpassed net value growth by 3.7 percent. He added that there was a 3.7 billion USD risk-free profit making potential, granted that the market wouldn’t dip below 1000.l.

　　The following four players contributed the robust rebound of the closed-end funds:

　　1)The National Social Security Fund placed large “buy” tickets through four fund companies (their designated asset managers) during the month of July.

　　2)Many closed-end funds institutional investors are large insurance companies and they bluntly requested the fund companies to plow money into their own depressed closed-funds when the discount rate (market value vs. net value) passed certain benchmark set by the insurance company.

　　3)Qualified Foreign Institutional Investors (QFII) have been aggressively pouring money into the closed-end fund. Statistics show that QFII bought 1.7 billion shares of closed-end fund in the first half of 2005，which was 1.2 billion shares more than they did by the end of 2004.

　　4)It is believed that private equity funds started to buy the closed-end fund.

　　Some analysts indicated that QFII should be credited with three positive change of “fortune” for the 54 closed-end funds as a whole.

　　1)Investors/share holder community turned from the single generic insurance company into a multi investors’ community.

　　2)As more trades changed hands, liquidity of the closed-end funds has significantly improved.

　　3)The gap between the market value and the net value has become narrowed.

　　All above elements provided a climate to make the ultimate “close” to “open” transition possible. QFII’s foreign market experience on how to conduct the transition will help CSRC accomplish the process.

　　9. Money Market Fund

　　For the early part of 2005, Money Market Funds had attracted more money than any other type of funds. However, the annualized 7-day yield on MMK fund has gone through a downward tunnel since February. One reason for the decline of short-term yield, some analysts say, is the expectation of more appreciation of RMB and China Central Bank’s intention to control the inflow of hot money.

　　One August 4th, the annualized 7 day yield for most of the MMK has dipped below 2%. The psychological “bottom line” for MMK investors is the after tax one-year savings account return at 1.8%. That’s why fund companies have seen redemption on even the “safest” investment instrument.

　　The yield on one-year Treasury bill has declined from the beginning of the year at 3.2% to 1.33% in early September. The investment vehicles allowed by CSRC before July 28, 2005 are: short-term debt; Treasury Bill; reverse repurchase agreement; one-year savings account in the bank and large sum of deposit; and floating rate debt benchmarked by the 7 day average yield.

　　To safe guard the 2% psychological “bottom line” yield on the MMK funds, fund managers started to use corporate promissory notes (3; 6; 9 month and one year term), and increasingly take on debt with longer duration. The practice triggered debate on whether this practice increased operational risk of the fund and betrayed the true value of MMK fund.

　　On July 28th, CSRC issued an official notice seeking fund companies’ feedback on broadening the scope of the investment vehicles, mainly to include corporate promissory notes and fixed term bank deposit. Some fund managers thought it was moving in the right direction. But some other believed that the fixed term bank deposit would decrease the liquidity of the MMK fund, plus there is no recognized rating system or institutions to evaluat the corporate promissory notes. The fundamental difficulty facing the fund managers is lack of legitimate investment vehicles. Recently, CSRC temporarily halted the review of applications for the new MMK funds.

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