China's guaranteed funds on watch

Added 17th May 2016

Mainland regulators warned of the risks on guaranteed funds, as they might not be 100% guaranteed due to existing “system deficiencies”.

China's guaranteed funds on watch

The China Securities Regulatory Commission said all guaranteed funds available in the market are under the joint guarantee scheme, meaning the potential losses could be taken by the fund house alone, instead of a third-party guarantor.

“This arrangement would have fund management companies bearing the ultimate risks of investment losses, which is not in line with the fund companies’ [operational cash flow] and might harm investor interests,” the regulator said in a press briefing on Friday.

Registration of new guaranteed funds will require fund management companies to perform a stress test and properly explain responsibility in the event of losses, the CSRC said.

For other forms of guaranteed funds, where the independent guarantor takes the full risks of potential losses, registration is not affected, the regulator added.

The number of guaranteed funds has spiked, rasing regulatory concern. At least 50 guaranteed funds have been launched onshore in China since the beginning of this year, mainland media reported, attracting RMB 118.7bn ($18.2bn) of capital in total.

In the full year 2015, 49 funds were set up and in 2014, only seven.

Morningstar China said earlier that more traditional funds, such as guaranteed funds, bond or commodity funds, and those with a low volatility strategy, are likely to be launched to meet the greater demand for lower risk products by onshore investors. 

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