China's funds industry is in its infancy. Since the introduction of the regulated funds regime by the China Securities Regulatory Commission ("CSRC") in 1997/98, China has experienced an unprecedented growth in its funds industry, as shown in the diagram below.

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Investment funds play a key role in the Chinese Government's economic reforms. They provide diversification in investments and, professionally managed, they help to foster stability in the securities markets and better corporate governance in the country, albeit there is room for improvement. Investment funds also serve as the vehicles for channelling China's vast pool of private savings into reforming State Owned Enterprises ("SOEs").

Latterly, investments funds are playing an increasingly crucial role in the Chinese Government's social security reform in shifting the responsibility for providing old age pensions from one pillar (state) to three pillars (state, employer, employee).

Regulated funds in China come in two forms, namely closed-ended and open-ended funds, and presently can only invest in local listed or permitted securities. Investments in regulated funds are restricted to the local population, although the Qualified Foreign Institutional Investor ("QFII") regime allows foreign investors limited access into the market.

The fund industry has been regulated by the CSRC in accordance with its provisional fund regulations until the enactment of the Securities Investment Fund Law in October 2003 that sets out the legal framework for fund regulations in the future.

The CSRC is taking a progressive view of fund regulations and is keen to introduce internationally accepted good practices into the country. The CSRC has established memoranda of understanding. When doing this, it co-operated with regulatory bodies in many jurisdictions, including Hong Kong's Securities and Futures Commission ("SFC"), the Securities and Exchanges Commission ("SEC") in the US and the Financial Services Authority ("FSA") in the UK.

China's funds industry currently consists of 25 competitive but profitable standalone local and eight Sino-foreign Joint Venture ("JV") Fund Management Companies ("FMCs") providing a fairly homogeneous set of investment funds to the general public. The number of licensed FMCs is expected to double over the next twelve to eighteen months.

There are currently nine FMCs that are expecting approval by the CSRC. The recent growth of the market is attributable to the issuance of sub-funds of umbrella funds. There are currently nine umbrella funds proposing 24 sub-funds.

Higher profitability can be achieved through being the first to introduce new and innovative fund products such as the recent launches in money market funds. Generally, however, above-normal returns are short-lived as others will quickly get onto the bandwagon. Nevertheless, the size of the above average return makes it worthwhile to invest in product development and be the first to launch new funds.

Local talent is in short supply resulting in intense competition amongst FMCs. Sino-foreign Joint Venture FMCs fair better as the foreign partners are able to contribute technical assistance and personnel on the ground to compensate for shortages in local talent.

With domestic reforms occurring on many fronts and the desire to be an engaging partner internationally, China is going through an interesting time. The ability of its funds industry to innovate and respond to China's economic reforms is seen by many as a key driver in growing China's fund industry.

PwC believes that China's fund industry will continue to experience double-digit growth in the foreseeable future.

Furthermore, since China joined the WTO in November 2001, we are seeing and working with an increasing number of foreign institutions entering the market principally through forming joint venture fund management companies with local Chinese business partners. We expect this positive trend to continue.

The signs are good for China to develop a successful funds industry. However, success will only come to those who continue to innovate.