China's Securities Investment Fund Industry Structure - Conduct - Performance (scp) Study

Since the promulgation of the Temporary Measures of the Management ofSecurities Investment Funds in November 1997, the securities investment industry ofthe PRC has obtained fast growth within a short period of time of 6 years. This paperadopts the SCP analysis structure and conducts research and investigation of theinter-connected effects and functions of the market structure, market conduct andmarket results of the fund industry in the PRC via industry organization theory. Thefund industry has been developed under the leadership of the PRC government,therefore the initial market structure had the typical monopolistic characteristicswhich was a result of the administrative monopoly. This type of market structuredetermined the conduct and the market performance of the fund managementcompanies at that time. As the PRC fund market continuously expands, the marketstructure is transforming from a monopoly one to a combination of both monopolyand competition. The strengthening of market competitive factors has positiveeffects on conditioning market conduct and performance. The government shouldwork hard to eliminate administrative barriers, to improve market conduct of the fundmanagement companies and to lift the market performance of the fund industrythrough developing a competitive fund industry market structure. On the other hand, it is shown through the SCP analysis that other environmentfactors including the development of the capital market, the investment culture factor(unofficial policies), the institution in place has placed very obvious restrain andinfluences on the market conduct and market performance. This paper does notdiscuss in details of the capital market and the culture factors and it places heavyemphasis on investigating the effect of the policies on the fund industry marketconduct and market performance. The institution of the fund industry determines themarket behaviour of the fund managers and the market performance of the fundindustry. Viewing various issues and problems confronting the PRC fund industry, aconclusion can be drawn that the institution is highly deficient. Investment fundindustry as a policies arrangement, its existence and its development is based on thepremise that the deal costs of investor participating in the financial market will beeffectively reduced. The deal costs mainly include the decision costs and costs toprevent the opportunistic behaviours of the agents. The costs of the deals determinethe efficiency of the fund institution. The fund market efficiency will be improved if iithe deal costs of the investors are reduced. The transformation from close endedfund to open ended fund is a significant achievement in the development of the PRCfund industry history. Corporate funds, due to its obvious institution advantages, willbe the future choice of institution for the development of the PRC fund industry. This paper actively refers to the advanced experiences of other countries,incorporates the circumstances of the development of the PRC fund industry,concludes that the industry policies of the government should be placed its emphasison the institution structure of the fund industry to accelerate the fast and healthdevelopment of the investment fund industry via reforming and recreation of theinstitution. With regard to the deficiencies and problems in relation to the existingPRC fund institution, fund managers should be properly lead to develop their marketbehaviour towards being more credible and professional via four mechanisms, i.e.market competition, information communication, supervision and reward mechanisms.The deal costs of investors participating in the financial market shall be reduced andthe fund market performance shall be improved.