China Securities Investment Fund Governance

As the basic safeguard for smooth development of the fund industry, fund governance is of great importance worldly. Effective and efficient management and operation of fund companies will greatly enhance the market fairness and stability and it can boost up investor's confidence and thereby speed the industry development. Though China has achieved a lot in respect of fund governance since fund industry emerged in China several years ago, it has been keeping close eyes on new problems along with the fund industry development. In order to remove those adverse factors that influence the healthy and sustaining development of fund industry, we urgently need systematic reasearch on fund governance, which will be of great significance for establishing an scientific and rational fund governance structure.This paper analyses series of problems in China's securities investment fund governance structure from the angle of Principal-Agent theory, systematically analyzing information asymmetry within the Principal-Agent Chain, and moral hazard,adverse selection and inside control as a resrult of information asymmetry. Based on these detailed analysis, the paper proposes solutions to current problems in China's investment fund governance structure. Aiming at moral hazard , adverse selection and inside control, this paper holds the view that Incentive & Constraint Mechanism for fund managent should be established, Fund inside governance and outside governance should be strengthened, and China's securities investment fund governance structure can be improved so.There are seven chapters in this paper, with the frist as an introduction. The other six chapters are the main body of the paper.The second chapter is a summary of fund governance related researching document and practice in developed countries. Fund governance practice in developed countries and districts are of great value because China can refer to and draw experience from them. Base on the experience of developed countries and realizing Chinese situations, what experts are more concerned with is how to explore and establish a suitable securities investment fund governance structure for china.Chapter three focuses on the current situations and problems of the governance of mutual funds in China. Despite a short history, China mutual fund industry achieved rapid expansion in terms of number of fund management companies and mutual funds and total assets under management (AUM) during the past decade. A fairly comprehensive mutual fund governancesystem has been established, which helps strengthen fund investors' confidence in mutual fund industry and accelerate its development. However, many governance problems still exist due to the incompleteness of legal system governing and institutional infrastructure underlying mutual fund industry. This chapter points out the major governance problems of China mutual funds by describing the current situations and comparing to the practices in the developed countries based on a brief review of the development of mutual funds in China.Chapter Four argues that principal-agent theory shall be applied to study the governance structure of mutual funds because such relationship exists between fund investors and fund managers. The information asymmetry within principal-agent relationship leads to different objectives among fund managers, fund investors and fund trustees, resulting in problems of adverse selection, moral hazard and insider control. Accounting for the particularity in China, the thesis explores the causes of fundamental governance problems of China mutual funds, namely, adverse selection, moral hazard and insider control, and their manifestation in China.Chapter Five & Six discusses how to set up both internal and external fond governance structure from the perspective of constraint and incentive mechanisms governing fund managers, with the former focusing on internal and the latter external. The thesis put forwards two suggestions: first, to improve internal governance mechanisms by focusing on fund managers from the perspective of incentive alignment; second, promote external governance mechanism in the meantime from enhancing fund market structure, repositioning the role of the state and facilitating self-discipline within mutual fund industry, by analyzing the governance problems raised in Chapter Four and learning from the experience in the developed countries.Chapter Seven elaborates the prevention and solution to the problem of insider control within mutual funds. Based on the analysis of the causes and manifestation of insider control within China mutual funds in Chapter Four, the author probes into solving the problem of insider control from the perspectives of internal governance, external governance, sharing management fees and setting up corporate funds. Furthermore, the thesis put forwards policy suggestions for establishing scientific and justifiable governance structure of mutual funds in China.