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Closed-end funds set to return with safeguards

(Shanghai Daily)
Updated: 2007-01-24 10:06

China's stock authorities are considering resuming the issuance of new closed-end funds, but they will make arrangements to let investors redeem holdings if a fund loses too much of its value, industry sources said yesterday.

TheChina Securities Regulatory Commissionwill soon vet applications from several big money managers to start sales of closed-end mutual funds, a practice not seen since 2001 when the market began to embrace open-end funds, according to people involved in the matter.

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Closed-end funds usually have a fixed number of units sold to investors and trade on bourses like normal securities. They often have a life span of between 10 and 15 years, during which time investments cannot be redeemed.

Open-end funds, which are not publicly traded, pool client capital periodically and invest in types of equities. Investors can choose to redeem the funds at any time after the initial lock-up periods.

The new closed-end funds will probably have a shorter life span, maybe up to five years, the sources said.

In addition, investors will be entitled to redeem holdings if the funds lose more than 10 percent of their value, they said.

"It's a product designed to steady the market by making funds' size relatively stable in the medium range," said a funds source based inShanghai. "The special arrangement can protect the interests of minority investors by making them suffer less when market volatility increases."

After years of stock market slumps, China's 50-odd closed-end funds are traded at a discount to net-asset value as their prices can fluctuate based on supply and demand.

Regulators are beefing up oversight of management on closed-end products this year amid complaints they have not been paid as much attention to as their open-end counterparts, which face redemption pressures if not performing well.

Under the new guidelines, a closed-end fund will face immediate risks of liquidation if its net value slumps by 15 percent or more. Investors will also be given more power to vote on the issue, the sources said.

The size of each new closed-end fund will be capped at nearly four billion yuan (513 million U.S. dollars), compared with one billion yuan to two billion yuan for an old closed-end product, according to the sources.

"Regulators are jittery that any deep corrections may prompt investors to redeem open-end products, which could cause markets to plunge further," said a second local source who is close to the issue. "Pushing forward closed-end funds can make capital inflows more sustainable."