A flurry of recent activity by China's legislature, cabinet and regulators points to greater competition in the mutual fund space and the continued transformation of banks into full-fledged financial institutions.

In just one week, the National People's Congress, China's legislature, approved a much-anticipated revision of the law governing funds. The State Council, China's cabinet, disclosed that it is considering plans to allow domestic commercial banks to establish their own in-house fund management companies.

Meanwhile, the China Securities Regulatory Commission released a draft plan to lower the threshold for mutual fund activities, allowing insurance companies, private fund managers and more brokerage firms to operate mutual funds. The change is part of broader plans to bolster the sluggish stock market.

"It will help increase the ranks of institutional investors and promote the long-term stable and healthy development of the capital markets," the regulatory commission said in a statement.

According to the draft, brokerages and insurers' asset management units will need to have at least 20 billion yuan (US$3.2 billion) in assets under management and demonstrate they have been profitable for the past three years.

Managers of private funds will be eligible if they have no less than 10 million yuan in paid-in capital and have managed a minimum of 3 billion yuan in any of the past three years.

Under the proposal, 14 insurance asset management units, 16 brokerages and 13 private fund managers would qualify, according to commission and analysts' estimates.

Wider competition

Some may question whether an increase in mutual funds will do much to help China's stock markets, but analysts said wider competition in the mutual fund industry could prove a boon to companies, especially domestic insurers suffering from slower business growth and losses from investment.

"From the experience overseas, asset management and assurance against risks are two major functions of insurance companies," said Yin Jinhua, an analyst of BOC International. "But for a long time in China, the asset management units of domestic insurance companies have focused on managing premium income and neglected their function in asset management."

He said large insurers, in particular, have advantages over existing mutual fund institutions in terms of analytical abilities, sales channels and product design. The prospect of selling mutual funds could bring new revenue to offset slower premium growth, Yin added.

The China Insurance Regulatory Commission last year widened investment options for insurers. They are now allowed to invest in a greater variety of bonds, financial derivatives and real estate projects.

"The new measures will encourage our innovation and development, and will promote competition among brokerages and fund houses," said Shi Xinwu, vice president of the asset management unit of the People's Insurance Company of China. "We believe the future will be brighter."

Brokerages, some of which already hold licenses to sell mutual fund products, are expected to benefit less from the industry deregulation.

"Brokerages with stronger investment and research capability will get a boost," said Yin. "However, stronger competition may reduce commission fees for brokerages and force them to improve their analytical abilities."

A stock rally that began in mid-December has given market players some optimism about better prospects in 2013.

Fund management consultancy Z-Ben Advisors has predicted assets under management at domestic mutual funds will climb to a record 3.68 trillion yuan this year, following a 30 percent rally to 2.8 trillion yuan in 2012.

Most industry leaders relied heavily on money-market funds last year, soaking up idle assets from risk-wary investors, Z-Ben said. But success last year is no guarantee of success for all in 2013.

"If equity markets do rally and manage to grab investor interest, firms that neglected their equity funds may suffer," Z-Ben said in a note. "The intentions of the securities regulator alone will bring significant competitive concerns to existing mutual fund managers. Firms will need to buckle down now if they are to successfully navigate the new environment."

Confusing investors

The changing industry may be confusing to ordinary investors. An online survey by news portal Sina.com revealed that 27 percent of more than 200 respondents said they would stick with existing mutual fund companies that they trust, followed by 25 percent favoring brokerages and 16 percent opting for private fund managers.

Asset management units of insurance companies drew the short straw, with just 10 percent of the vote.

Any massive expansion of mutual funds would be seen as a signal that the financial industry would be freer to expand product choices under one roof.

However, the degree of regulation over the expanding industry remains a concern.

Questions abound whether China's current fragmented regulatory framework could handle the rapidly converging landscape of financial services.

"Different industries are now subject to different regulatory requirements, such as risk control and available investment options," said a private fund analyst, who declined to be identified. "Sometimes it leaves room for irregularities."

The lack of transparency of wealth management products sold by banks has made headlines since November, amid allegations that they have been hiding risks off their balance sheets and incurring losses for investors who buy products with higher interest returns than traditional bank deposits.

Risks may only mount if more financial institutions, some even less transparent than banks, get their hands into the public's pocketbooks.

Risky investment

One needs only to hark back to the early 1990s to see possible problems. At that time, all financial sectors were under the sole supervision of the People's Bank of China. Inflation was rampant, and banks were accused of using deposit money to invest in risky new futures, stocks and property ventures.

To restore order, China created separate regulatory agencies for banking, securities, and the insurance industry in 1993. Financial institutions were allowed to operate only in one sector.

Ten years ago, the State Council began pilot projects allowing three companies to cross financial borders. They were CITIC Group Corp, which was founded in 1979 as a trust firm; China Everbright Group, which began as a trading company in 1983; and Ping An Insurance (Group) Co. These financial conglomerates now own affiliates that cover the spectrum from securities and banking to trusts and insurance.

The trend of converging financial sectors call for a new regulatory structure with specialized, cross-segment supervision.

"The newly passed Fund Law dictates unified regulatory standards when different companies are allowed to sell mutual funds, but the supervisors will still be different," Wu Xiaoling, former deputy governor of the central bank, told a recent forum in Beijing. "The current regulatory framework is unchanged."

Despite all the talk about cross-sector operations, there are still no plans to bring order to the patchwork of supervisory functions, the China Business Journal reported last week.

"We may adopt the international practice of holding regular conferences attended by various authorities, and we may set up a special committee to inspect different sectors when the time is ripe," the paper reported, citing an unidentified official from the central government.

"The central government has stepped up its study concerning unified regulation in recent years," it added.