China is expected to come up with legislation on stock investment funds at the end of this year that authorities hope will help fuel the burgeoning development of fund industry and become a stabilizing force in the nation's sluggish stock market.

　　While there are about 56 stock funds in China, they are currently governed by only a regulation on the management of stock funds issued by the State Council - China's cabinet - in 1997.

　　But the regulation does not suit the fast developing stock fund market, particularly now that China is a member of World Trade Organization.

　　A more sophisticated law would oversee all registration and activities of investment companies that run stock funds and help add a more orderly presence to current immature market sentiments, said Zhu Shaoping, a legislative official with the Finance and Economic Committee under the National People's Congress (NPC), China's top legislature.

　　The draft law on stock investment funds, which has been studied by legislative officials for three years, went through the preliminary review by the NPC Standing Committee last month. The standing committee represents the entire legislature on matters that take place outside the NPC's annual meeting.

　　The proposal was first initiated by Zhu's committee in 1999.

　　The draft legislation defines the existing stock funds in China.

　　Stock funds are mainly mutual funds that invest primarily in stocks and are operated by investment companies.

　　Retail investors pay a fee to invest their pooled money insgroupsto see more stable returns on investments through the use of professional fund managers.

　　Currently most stock funds in China are close-ended, which means there are a fixed number of total shares available.

　　Close-ended stock funds also cannot be resold to a company for a fixed period of time and shares can only be traded among other investors. In this way, the total investment of the fund remains unchanged.

　　Open-ended funds, on the other hand, are more common in the West and availability is based on demand. In China, investors can only buy and redeem their shares at banks. They cannot sell them in the market during the life of the fund.

　　China's first pilot open-ended fund management firm debuted last March and there are currently four other open-ended funds on the market.

　　The draft legislation includes stipulations that standardize the operation of investment companies and check for irregularities such as opaque operations and late disclosures of information.

　　It has also designed principles for the set-up, purchase and redemption of open-ended funds, which allows more fluidity and requires stricter management and risk control as well as higher transparency.

　　Li Yining, vice-director of the NPC Finance and Economic Committee, said that the draft legislation was designed to develop more institutional investors in the stock market, offer new investment choices to investors, check irregularities in the fund industry for its healthy development as well as honor China's commitments to World Trade Organization to open its financial market.

　　China launched its stock exchanges in Beijing and Shenzhen at the end of 1990. Most of the 64 million stockholders in the Chinese mainland's stock market invest individually and are generally weak in shielding off risk and are more vulnerable to market fluctuations, Zhu said, adding that it is extremely disadvantageous to the stability of the market.

　　However, institutional investors dominate most of the foreign stock markets, he said.

　　It is an important criterion to judge the maturity of a stock market by seeing the proportion of institutional investors in the market.

　　China is in urgent need to boost the institutional investors while create new investment opportunities for the ordinary people.

　　The Chinese market now has 56 stock investment funds, held by some 3.37 million fund holders and managing 93.6 billion yuan (US.3 billion). That accounts for around 2 per cent of the gross value of the stock market and 6 per cent of its working market value, working on the market value at the end of last year.

　　The figure is meager comparing with China's bulging deposits in its banks.

　　China's urban and rural residents now hoard a total of astronomical 8 trillion yuan (US billion) in banks. China is one of the countries with the highest deposit rate in the world.

　　Chinese policy-makers and economists have reached a consensus that idle huge bank deposits should be channeled to the stock market, if the country's current robust GDP growth is to be sustained. The stock market is widely believed the most effective way to pipe the bank depositssintosinvestment of promising enterprises.

　　However, Chinese people have a tradition to save the bulk of their earnings in the banks. The absence of a well-knit social security network along with the rocketing expense on medical care and education have further enhanced their determination to keep the money in the bank although deposit rate has been axed again and again.

　　Choices are few for those who try to make investment. Most of the ordinary people have no experience and knowledge to make industrial investment. The immature stock market has high risk for them as well.

　　The draft legislation aims to offer a new if not better investment choice for these people, Zhu said.

　　The stock investment fund, managed by professionals, tends to make more rational investment and is under strict supervision of the State securities watchdog, China Securities Regulatory Commission in this case.

　　Investment companies are encouraged to make innovations and produce more new investment products, Zhu added.

　　Policymakers also expect the legislation could help boost the development of China's fledging and promising fund industry.

　　With 93.6 billion yuan (US.3 billion) in total, China's stock fund industry is still small in scale and too weak to guide investment and play a positive role in the healthy development of the stock market.

　　Most of the investment companies lack experiences in operation and need to make improvement in internal responsibility control, professional ethics and supervision.

　　Some of the fund managers have dim sense of self-discipline at the initial stage of the fund development when they enjoy the nation's preferential policies. Irregularities such as opaque operation, poor allocation of investment and late disclosure of information, which have been disclosed by the media, have also undermined people's confidence in the fund industry.

　　The draft legislation is expected to check such irregularities and step up supervision to restore investors' confidence, Zhu said.

　　It also hopes to better regulate the fund industry so that it can run up to international standards and live up to global competition after China officially became a member of the World Trade Organization last December.

　　The Chinese Government has promised to the global trade club that it will gradually open its financial market including the stock market.

　　The draft legislation also clear way for foreign entrysintosthe sector, Zhu said. China has promised to permit foreign capital to invest in fund management institutions. Foreign investors could set up joint-ventures of fund management institutions but they are still banned from trading A shares in the Chinese stock market.

　　Nearly 20 fund management companies, securities firms and banks in China have signed co-operative agreements with foreign asset management firms and other financial institutions. Some are in final negotiations over the establishment of fund management joint ventures and some have filed their applications.

　　Some fund managers said the authorities will looksintosthe strength of the foreign applicants for fund management joint ventures, including their assets scale, reputation and familiarity with the Chinese market.

　　During the first round of deliberations on the draft legislation, senior lawmakers focused on how to enhance the protection of individual investors in the stock market.

　　"This is also the most important guideline for the draft law," Zhu said. "Investors are willing to give money to fund managers only when their legal interests are well guarded."

　　Zhu said the draft law pays special attention to the protection of individual investors because they are generally weak in shielding off investment risks and are more vulnerable to market fluctuations.

　　Zhou Zhengqing, vice-director of the NPC Financial and Economic Committee, told the panel discussion on the draft law: "It is one of the fundamental ways to protect individual investors and bring more institutional investorssintosthe market."

　　Zhou said the stock investment funds of institutional investors could bring a stable return on investment through the use of professional fund managers.

　　Legislator Zhang Haoruo said that rational institutional investors would become a stabilizing force in the Chinese mainland's immature stock market and helping make the market more orderly.

　　The draft legislation demands that investment companies make a timely disclosure of information on major issues such as investment structure and the net assets of the funds.

　　It also says that holders of stock investment funds have the right to convene a meeting of fund holders to participate in major decision-making processes.

　　Such meetings could be held in one particular location or via the Internet by more than 50 per cent of fund holders.

　　Legislator Tong Zhiguang said it would be difficult to gather together more than half of the fund investors for a meeting.

　　Legislator Gu Shanqing complained that such a provision was not practical and should be deleted from the draft law.

　　But legislator Li Yining, said it is necessary to hold such meetings because fund investment entails risks.

　　Zhu said the protection on individual investors in this draft legislation is stronger than that in the Securities Law. Insufficient protection especially the absence of stipulations on civil liability and compensation in the Securities Law has triggered hot debate in this nation.

　　Zhu said the draft did not spark much debate among lawmakers in their first round of deliberations thanks to the careful preparation for the draft legislation.

　　China's Legislative Procedure Law stipulates that a drafted legislation is eligible for a vote after three rounds of deliberations by lawmakers if they are not seriously divided on the draft.

　　The top legislature will hold their by-monthly sessions in October and December. Zhu said the draft is very likely to get the green light from it at the end of December.