A fund management joint venture established by China Construction Bank, Principal Financial Group Inc of the United States and China Huadian Group kicked off business in Beijing yesterday.

The CCB Principal Asset Management Co Ltd, in which China Construction Bank holds a 65 per cent stake, Principal holds a 25 per cent and Huadian holds a 10 per cent stake, was the third fund management joint venture launched by a Chinese commercial bank with its domestic and foreign partners.

The Industrial and Commercial Bank of China launched the first such joint venture with Credit Suisse First Boston and China COSCO Group in July.

Last month Bank of Communications also launched its fund management joint venture with the Schroder Investment Management Ltd and China International Marine Containers (Group) Co Ltd.

The three banks were chosen as pilot projects by the financial authorities to launch the country's fund management companies.

China's commercial banks were previously banned from establishing such companies and were only allowed to sell mutual funds.

Economists believe that the establishment of fund management companies by commercial banks is good news for China's financial reform and development of its securities market.

China's financial industry has long been troubled by the emphasis on indirect financing, meaning economic development relies heavily on bank loans. The direct financing business on the securities market is relatively underdeveloped.

This situation would increase the country's financial risks, one economist said.

Establishment of fund management companies by commercial banks would help expand the direct financing business, he said.

He followed by revealing that the establishment of such a joint venture by China Construction Bank has even greater significance, because it plans to go public next month.

The fund management company would help increase the competitiveness of China Construction Bank, he said.

For the same purpose (of increasing the competitive edge), the bank signed a strategic co-operation agreement with Bank of America and Temasek Holdings (Private) Limited in June and July respectively.

According to an agreement signed in June, Bank of America will not only buy a stake from China Construction Bank, but also provide about 50 personnel to advise the bank in areas such as corporate governance, risk management and retail banking.

Temasek will also assist China Construction Bank in improving corporate governance, besides making a stake purchase.

China Construction Bank, which received a US$22.5 billion capital injection from the State in late 2003, was a pilot project of the country's banking reform.

Last September, the bank was split into two parts - China Construction Bank Corporation and China Jianyin Investment Limited.

China Construction Bank Corporation, the joint stock listing vehicle, continues to operate the banking business.

By the end of last year, the bank's non-performing loans were 3.92 per cent, while its capital adequacy ratio stood at 11.29 per cent.

The lender's profits rose 34 per cent last year to 50.2 billion yuan (US$6.2 billion) as new lending increased 11.5 per cent to 229.6 billion yuan (US$28.3 billion).

(China Daily 09/29/2005 page9)