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A state-owned fund company with limited liability, the China Securities Investor Protection Fund will manage the assets raised, which currently stands at RMB680 billion.
The fund is governed by the China Securities Investors Protection Regulation issued in 2005. A review committee within the CSRC, which has driven the idea, classifies securities firms into 10 categories based on business risk. The lowest-risk businesses must pay 0.5% of annual revenues into the fund, with each rank paying another 0.5% and the most risky ones paying 5% to the fund.
The fund will also be augmented by a 20% levy on transactions charges made on the Shanghai and Shenzhen stock exchanges, as well as by interest income generated by frozen funds in IPO launches, retrieved assets in securities firmsÆ bankruptcies, and voluntary donations.
ôInstead of seeing it as a burden to investor, we consider it to be a major step in the evolution of the China market,ö says a CSRC spokesman.
For now the plan only targets securities firms but industry executives wonder if it will expand to include fund management companies, or to banks selling investment products. Securities firms can manage investors' money in segregated accounts. In the past, the industry has been subject to abuse and fraud, leading to investors' losses. It is considered less well regulated than fund management companies.
The list of participants sheds light on how far wealth has been distributed throughout China. While the expected state and business capitals such as Beijing and Shanghai are represented, so are destinations ranging from up-and-coming destinations such as Tianjin and Chongqing, as well as backwaters such as Inner Mongolia, Xinjiang and Tibet.
The protection fund is meant to be used to compensate investors only when securities firms lose their licenses, go bankrupt, discontinue business, or see their business taken over by the government. Regulations should prevent the fund from being called upon in the event of losses in the market.
Investment banks and brokerage firms need not get too excited. The scope of asset management for the fund is limited to bank deposits and Chinese government bonds.
Chen Hungyan, a former CSRC director in charge of institutional markets and risk management, will run the new fund company as chairman. Other senior recruits include Liu Sian, a former assistant manager of the Shanghai Stock Exchange; Liu Suai, last an assistant manager of China Securities Registration & Clearing Company; Jiang Yefun, a currency analyst from PeopleÆs Bank of China; Jiang Siwei, another official of the CSRC; and Mang Guojan, director of government bond issuance in the Ministry of Finance.
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