The China Securities Regulatory Commission (CSRC) has today (Friday) announced it will relax restrictions on who can own a domestic fund management company.

At present only Chinese securities companies or investment trust companies can hold shares in a fund manager. According to local fund management executives, today's announcement opens it up to any law-abiding Chinese entity.

This could alter the basis on which foreigners have sought entry to China's fund management industry. Foreign asset management firms have courted domestic securities and fund management companies with the hope of eventually establishing Sino-foreign, joint-venture fund management companies as stipulated under World Trade Organization rules. This would allow a foreigner to own up to 33% of a company three years after China's accession, and 49% after five years.

One local fund manager says today's announcement opens the door for any domestic enterprise -- an insurance company, a bank, a state-owned enterprise, a private concern -- to eventually own a fund management company. This implies, he says, that the same will eventually hold true for foreign interests. "The door is open," he says.

The CSRC announcement raises several questions. These unknowns will take some time to be resolved. Fund managers in China believe the government will begin to pass concrete regulations to comply with this new announcement soon. Similar rules regarding foreigners can be put in place after China joins WTO, meaning by mid-2002, there may be clarity as to what foreign organizations will be allowed to enter fund management joint ventures with an expanded variety of local partners.

Domestic banks, however, may still face restrictions. The local commercial banking code stipulates they may invest in non-commercial banking assets. So even though the CSRC will not prevent a Chinese bank from owning a fund management company, other banking regulations may. This implies foreign banks may face similar problems.

Today nearly all of China's 14 domestic fund management companies are owned by securities companies; the main exception is Shanghai's Hua An Fund Management, which is 30% owned by Shanghai International Trust and Investment Corp. Prior to 1997, there were scores of fund management companies run by securities companies with very little regulation. Today's companies -- 10 relatively established, four others just a few months old -- are amalgamations of that pre-1997 environment.