Zhang Haifu isn't crazy. But from the perspective of his wife, he was a madman mortgaging their house to the bank for 300,000 yuan to buy stock funds. Zhang's wife could not accept the bold move because for her, the house meant family and if the house was gone, the family was no longer intact.

"I know what I am doing," Zhang Haifu said, calling his move an action after careful consideration.

Like many other Chinese, he threw caution--and security--to the wind to embrace new stock market opportunities.

Zhang Haifu and his wife run a supermarket and are already well-off. But the idea of riches beyond imagination crept into Zhang Haifu's mind last October, when he went to deposit money in the bank. It was then that he found a lot of people buying funds.

Zhang Haifu was no spring chicken in the financial market as he was once an avid stock market risk taker. So upon realizing one certain fund was doing well, Zhang Haifu bought it instead of depositing the money into a bank account. In just two months, Zhang earned a fortune.

By the middle of January, securities companies and banks saw people queuing to open new fund accounts. In January alone, a total of 1.85 million new accounts were opened.

Zhang Haifu's story epitomizes China's "fund rush" in recent months. According to Xinhua News Agency, the total number of fund account holders surpassed 15 million by the end of 2006.

Guo Tehua, General Manager of ICBC Credit Suisse Asset Management Co. Ltd. pointed out that citizens' enthusiasm about funds stems from the bullish stock market. In the second half of last year, China's yuan-denominated A share market began to jump. As most of the people who wanted to invest in stock did not know much about the market, they turned to open-end funds. From the perspective of fund buyers, the people who operate funds are experts in the financial market and it is relatively safe to give money to professionals and let them make decisions.

"About 98 percent of the subscriptions came from individual investors and these people are very enthusiastic," said Xu Xiaosong, Vice General Manager of China Southern Fund Management Co. Ltd. Xu said he had never seen such a vibrant scenario.

Zhang Haifu said when the Lombarda Open-end Fund was issued on January 4, he went to the bank four days later and was told it was sold out.

"To buy a fund is like buying discount products of a limited volume," Zhang Haifu said. "You will get nothing if you don't hurry."

The rise of funds

The buyers' enthusiasm also has made it easier to raise funds. Harvest Strategic Growth fund, launched last December, raised about 40 billion yuan on the first day it was launched. It is the largest fund in Chinese fund history and it would have taken several months to raise such an amount one year ago.

The Chinese fund industry has a history of only eight years. Total fund assets by the end of 2005 was 469.1 billion yuan, but now has surpassed 1 trillion yuan.

Statistics from TX Investment Consulting Co. Ltd. show that among the 1 trillion yuan in fund assets, open-end stock funds have taken up the most proportion--about 43 percent, which equals 427.25 billion yuan. The open-end mixed funds take up 27.5 percent of the total fund assets.

Fund manager Zhang Gang with China Nature Asset Management Co. Ltd. pointed out the "fund rush" has actually provided Chinese citizens a way to manage their spare money. The "fund rush" also indicated citizens' awareness of financing. Individuals' enthusiasm in open-end funds show that they have realized the risks of investing in the stock market and they would rather choose professionals to manage their money.

Zhang Gang said among the 10 trillion yuan value in the Chinese A share market, about 3 trillion yuan are tradable and the value of funds invested in the stock market has reached 850 billion yuan, taking up about one third of the total A share market value.

"Funds have become vital institutional investors in the Chinese mainland securities market and indispensable financing tools for ordinary mainland investors," said Zhang Gang.

Bank deposits also have decreased to some extent. Statistics from the People's Bank of China show deposits in financial institutions increased 2.09 trillion yuan. Compared with the same period last year, the growth decreased 112.5 billion yuan. Meanwhile, at bank counters, many are withdrawing money instead of depositing.

Xu Jianqiang, an analyst with CITIC Securities recommended several fund management companies like E Fund Management Co. Ltd., China International Fund Management Co. Ltd. and Guangfa Fund Management. Xu said currently, foreign capital can invest in the Chinese yuan-denominated A share market through qualified foreign institutional investors (QFIIs). However, as Xu said, in terms of funds, QFIIs can only invest in closed-end funds by now. QFIIs can set up joint venture fund management companies and they can manage funds but not invest in other funds.

No free lunch

According to China Galaxy Securities, in 2006, the average return of stock funds reached a surprising 21.41 percent. Nearly all funds experienced a significant growth from the previous year.

But will the fund legend continue this year?

Experts and even fund management companies are worried about the "fund rush." Many fund managers expressed their concerns.

Wang Hongbin, General Manager of China International Fund Management Co. Ltd., worried that many investors have no idea what a fund is and they buy funds heedlessly without realizing the existence of risks.

It is interesting to find that many of the fund buyers are senior citizens and know little about funds. They would go directly to the bank assistant and buy some funds after suggestions are given.

"It is not good for fund operations," said Wang Hongbin.

Wang Hongbin pointed out those people are vulnerable to risks. If the market fluctuates a little bit, the group of people will go for redemption immediately. Therefore, fund managers must spare more effort in dealing with fund liquidity. In 2006, some fund management companies suffered huge losses when large-scale redemption occurred.

"We don't suggest people buy funds blindly," noted Wang Hongbin.

Zhou Yueqiu, managing director in charge of asset trust with ICBC, agreed.

"Currently, people tend to have high expectations in funds and are investing irrationally. Everyone wants to make a fortune by speculating in the fund market," said Zhou.

Not only are buyers irrational. The fund agencies can be too. Fund salespeople, for instance, will only tell buyers which fund is good, with high returns, and seldom tell them that risks exist.

As most of the funds are invested in the stock market and the stock market bears high risks, even the most effective market cannot avoid certain risks. Once the stock market fluctuates sharply, fund investors will probably suffer huge losses.

"How can we make investors know more about a fund management company? How can we teach them to buy and when? Answers to these questions are vital to keep both fund management companies and investors sober and are also conducive to the long-term and healthy development of stock market," said Fang Yonghong, General Manager of China Asset Management Co. Ltd.

Adequate supervision

At the end of last year, the China Securities Regulatory Commission (CSRC) suspended approval for the issuance of new funds, fearing the stock market was overheated. However, right after the suspension, the stock market suffered a great concussion and many people rushed to redeem their funds, causing huge losses to fund management companies.

In February, CSRC lifted the approval suspension and approved five new funds. Experts contended it will help inject new capital in the stock market and it shows the government's effort in maintaining a bullish market.

Nonetheless, the government is still concerned about maintaining proper supervision.

CSRC recently issued a document calling for fund management companies to disclose their operational information and problems by February 1 of this year. Since then, CSRC and local securities regulatory bureaus have held on-site inspections of fund management companies to monitor the companies' performance in terms of investment, sales, information disclosure and operations. Anyone found guilty would be punished accordingly. The inspection is still ongoing.

As a matter of fact, fund management companies have different policies regarding insider trading. Some companies prohibit investment management professionals from buying stocks but allow them to invest in funds. Others allow neither transaction. Most fund management companies don't allow insiders and their immediate relatives to trade stocks, but have no specific regulations on fund investments.

"As far as I'm concerned, this kind of large-scale issuance of supervisory regulations is unprecedented," a veteran fund supervisor told China Securities Journal. "It shows that the supervisory departments are worried about the operation of fund management companies. The fund industry has attracted much more money than before. But without proper and strict supervision, it will probably mean greater risks for the society."