The China Securities Regulatory Commission is fighting multiple battles in its mission to reform the regulations governing the fund industry. When CSRC chairman Shang Fulin spoke at a fund industry conference in Beijing last week, close to 300 executives from fund houses, custodian banks and brokerages' fund-distribution arms turned up to hear him give his latest thoughts.

No decoding was required on reading his speech. Shang clearly outlined the CSRC's strong desire to see further institutionalisation of China's securities market.

First things first. After spending a year climbing out of the trough of the global crisis, the Chinese financial community needs a pat on the back, feels Shang. He says that over the course of 2009, China's capital markets have shown signs of stabilisation; Chinese investors have regained their investment confidence; listed companies' profitability has shown definite signs of improvement.

Among the commission's list of achievements during the crisis, the country has just launched its long-anticipated Growth Enterprise Bourse in Shenzhen. It was set up with the aim of facilitating financing for younger, more innovative businesses and to groom a venture-capital culture in China. 2009 also marks the year of the completion of CSRC's exhaustive reform to allow conversion of non-tradable shares in the open markets. Concurrently, the commission has battled to fight front-running and strengthen corporate governance in the industry.

The developments are meeting strategic plans outlined by top politicos from the Chinese Communist Party and the State Council. Shang reckons China is ready to take the next big step: further institutionalisation.

On paper, asset sizes and volume growth in the asset management industry now indeed look formidable. However, Shang bluntly stressed that, more than anything, the industry needs to be conscious of the weaknesses still plaguing China. Compared to more advanced markets, developments in the country remain unbalanced, singular and immature, he said, while Chinese institutional investors lack scale, risk awareness and the ability to innovate.

China desperately needs more structural transformation. The country needs institutional investors to act as anchors for the capital markets. Institutional money should be used for achieving long-term goals; for increasing the respect for investor interests; and for fostering innovation and sustainability. (Given how Shang uses the term "institutional investors" here, it seems he brackets fund managers together with the National Social Security Fund, insurance capital, qualified foreign institutional investors and enterprise annuities.)

The CSRC is doing its bit to encourage institutional expansion. It is pressing ahead with reforms to make licensing of fund rating agencies compulsory and overhauling the fee structures between fund issuers and product distributors. It is also working on simplifying the regulatory approval process for products. Such moves are meant to rebalance past distortions hindering the development of the asset management industry.

The commission now wants fund managers to get serious in pushing for a pluralistic environment as these reforms come into effect. Using mutual fund products as anchors, fund managers should try to expand through private placements and segregated management products, and gradually broaden out from domestic products to overseas qualified domestic institutional investors -- go diversify and innovate!

Throughout the speech, Shang's tone bordered on the paternal. He urged fund managers, in particular, to think with a liberated spirit, catch up with modernity, live with a sense of urgency, and forge a brighter future for the capital markets in China. Under no circumstances are fund managers ever again to engage in disrespectful behaviour such as front-running, he said.

Shang also set out four basic principles where he finds the industry to be most lacking. Fund managers need to protect investor interests, raise the overall standards of quality in their work, press ahead with innovation and strengthen their awareness of compliance.