China's central bank voted Sunday to allow banks to launch mutual funds of their own or to partner with foreign investment advisors or domestic insurers or pension companies to do so. Although any new fund must initially invest in money market instruments or bonds, it will be allowed to expand into securities and other investments after a trial period as well as consulting with shareholders and the board.
China is setting the initial limits because it has been trying to slow its burgeoning economy, for fear of political or economic unrest. Also, during a boom in 1996, Chinese corporations and brokerage firms took out bank loans to illegally buy up stocks, which led to volatility, steep losses and a government restriction on the use of bank money to invest in the stock market. Chinese regulators also created a separation between banks, insurers and brokerages.
The central bank's decision to allow banks to set up mutual funds follows a similar decision by the State Council in September. Banks expected to enter the market include China Merchants Bank, Minsheng Banking and Pudong Development Bank.