Clothing dealer Duan Tianyu owns a shop in Beijing. Three times a week he goes back and forth to the bank to manage his bank account. In the last two months, Duan has developed a new habit before going to the bank--reading the newspaper to see if any new funds have been issued.

"If there are new funds for sale, I go to the bank after 3 p.m., which is the official closing time for purchasing funds. Otherwise, half the day will be lost waiting in the bank," explained Duan. He complained of the great number of people lining up to buy funds, forcing him to wait until the wave is over after three. "People are going crazy. They seem to believe that once they buy a fund, they will get rich overnight. They already have more than half the bank counters dedicated to them, but they still complain about the speed," Duan said.

Duan's experience is not uncommon. Since the second half of 2006, the soaring net value of mutual funds has lured many to join the stock feast. The latest figures from the Chinese Securities Regulatory Commission (CSRC) showed that by the end of October, the number of fund investors had reached an astonishing 90 million, nine times more than there were at the end of 2006. "Have you bought any funds?" or "How much did your funds increase lately?" have become typical greetings among friends. In just a short period of time, funds have become one of the hottest topics for ordinary citizens.

Under such circumstances, the supervisory department has started to strengthen controls over the rapidly expanding funds. On November 4, the watchdog issued "Document 44," which requires all fund management companies to stick to long-term and stable operational plans, matching asset expansion with the management capability, while strictly forbidding the blind pursuit of scale.

Three days after the document was issued, many fund management companies suspended their marketing efforts and investors were not able to buy funds.

"The individual investors are now turning to professional investment institutions instead of operating by themselves," said Jiang Haichuan, economics professor with University of International Business and Economics. "It is a major advance for this country." However, Jiang also pointed out that funds are not as profitable as people imagine and risks still exist. Jiang argued that the issuance of Document 44 was intended to cool down the fund buying fever. Though the stock market could tumble from the stricter controls, individual investors' interests will be protected in the long run.

Inhaling fund helium

Since the beginning of 2007, enthusiasm for the purchase of new funds has surged. Many new funds were sold out on their first day of issuance. On April 10, a new fund called China International Domestic Demand Dynamic Stock Fund attracted 90 billion yuan ($11.7 billion) on its first trading day while its upper limit of scale was 10 billion yuan ($1.3 billion).

Statistics from the CSRC show that by the end of October, 59 fund management companies were operating a total of 341 different funds. Total scale of the funds was 2.06 trillion units, and they possessed 3.31 trillion yuan ($440 billion) of total market value, 2.8 and 3.8 times greater, respectively, compared to the start of this year.

Third quarter reports from fund management companies revealed that the asset scale of 10 fund companies exceeded 100 billion yuan ($13.33 billion), such as Boshi Funds, China Asset Management and E Fund Management. Money managed by Boshi Funds and China Asset Management surpassed 200 billion yuan ($26.67 billion) respectively. Compared to the second quarter, reports at that time showed only five fund management companies with assets over 100 billion yuan.

Zhang Jianhui, an analyst with Sinolink Securities, said the swelling fund scale was partly because of the increasing awareness about investment among ordinary Chinese citizens and that funds are becoming accepted as a way of wealth management. On the other hand, some fund management companies have manipulated their stock prices to pursue rapid scale expansion in a short period of time.

It is understandable why fund managers did that, Zhang said. Mutual funds can earn more money by charging a management fee. In order to achieve this goal, fund managers have tried hard to expand their scale.

Correcting the false

Document 44 has specified the regulator's requirements for the fund market.

For instance, the document forbids fund management companies or their sales agents from tempting investors to falsely believing that funds with low net value are cheaper. The fund management companies are also not allowed to create an atmosphere where investors believe that the fund is hot and that if they don't buy it now, they will never be able to buy it. Meanwhile, fund managers must control the scale of their funds.

Moreover, fund companies must warn investors of risks they might face if they buy funds. They must market suitable products according to the situation of each individual investor.

Document 44 has made it clear that fund management companies must maintain a long-term operational method and that blind expansion is strictly forbidden in an effort to protect the long term interests of investors.

Straightjacket on fund mania

Currently, assets managed by fund management companies account for over one third of the tradable market value in the mainland stock market and have become the biggest factor influencing the stock market. Document 44, aimed at cooling fund enthusiasm, had also caused the stock market to suffer.

On November 5, the first Monday after the document was issued, the mainland stock market witnessed its biggest weekly slump in history. In one week (November 5-9), the benchmark Shanghai Composite Index dropped 8 percent, making it the sharpest weekly index drop. In the fund market, 27 funds fell under their paper value of one yuan. Meanwhile, the net value of 214 out of 270 equity funds fell 4 percent in a single week.

"As long as there is new money being invested in the funds, the fund managers will need to buy stocks," Zhang Jianhui said. "Yet under the pressure of redemption, the managers will be forced to sell."

Since October 17, the mainland stock market has witnessed a new round of adjustment. Many fund investors started to redeem funds to avoid further risks. However, to cope with the redemption, managers have had to sell even good-performing blue chips, which in turn caused even a more serious market decline.

Worse still, the issuance of new funds has been restricted. Statistics show that except for qualified domestic institutional investors, the last fund that was issued was by China Asset Management on September 5. The stock market has lacked sufficient fund support ever since.

Zhang Yu, a fund analyst with China Jianyin Investment Securities, said the regulatory department should not do the risk control alone. The fund managers and fund investors must readjust their mentality before they invest.

"Since the beginning of 2006, tempted by the money-making effect of funds, investors have been at ease when putting their money into the hands of fund managers," Zhang said. "Nearly all of them made money." However, when the profitability of funds suddenly dropped, the enthusiasm was deeply curtailed, said Zhang.

After seeing her friends and neighbors making money by investing in funds, Liu Linqing, a self-employed shop assistant, withdrew half of her life savings-30,000 yuan-and bought three funds. She bought the funds on October 10, but by November 20, her assets had shrunk to no more than 25,000 yuan as the Shanghai Composite Index dropped from the peak of 6,124 points on October 16 to 5,293 points on November 20. Liu was caught in a dilemma. "If I sell the funds, I lose several thousand yuan," Liu said. "If I don't, who knows how much they will continue to fall?" Liu said her friends who had made money earlier were also complaining of shrinking assets due to the gloomy stock market performance.

Song Sanjiang, market director at Fortune SGAM Fund Management, is optimistic about the future of market trends. Song believes mainland investors are becoming more and more mature. "Even when the fund value dropped, they did not run to redeem the fund. Although the purchase value also declined, the fund companies still have more money coming in than out."

Song said that although fund managers were unable to expand fund scale at will, this did not mean the money supply to the stock market would drop. The supervisory department's intention was to guide the fund industry into a healthy development trend, not to call off fund management totally, Song said.

Since November 14, over 10 funds have resumed selling to investors and these new purchases will inject an estimated 130 billion yuan ($17.57 billion) into the stock market.