A China Mutual Fund Project

Wei G. Song
Tian Yi Security Co., Ltd.



Abstract
With China joined the WTO, its economy will embrace the world with unprecedented fresh
attitude and manner, it is the historical moment for seeking concrete cooperation between China
securities houses and foreign financial entities. Besides the investment bank, the mutual fund
industry is one of the hot spots for joint venture or other cooperation manifestation. Through
cooperation, management experience, client base, market resource (distribution channel, public
relationship), investment expertise, product design technology and all critical enterprise resource
can be shared between partners. Information, monetary and human resource will be exchanged and
reinforced between both parties; hence attractive rate of return and healthy growth prospective can
be secured for the company and all its investors.












This paper can be downloaded from the
Social Science Research Network Electronic Paper Collection:
http://papers.ssrn.com/abstract=292799




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1. Sustainable growth of China Economic

A. The Growth of China economic in the past 20 years catches the eye of the world

In the past 20 years, China National economic measured by the Gross
Domestic Products has experienced four folds growth together with
national income.
China successfully dodged the Asia Financial crisis, foreign trade
volume continue to soar, it reaches USD 475 billion in year 2000, the
export volume at least take 23% of GDP. China now is the 9
th
biggest
export economic in the world.
The quantity as well as the quality of foreign investment in China
has been continually improved. The cumulative foreign investment in
China reaches USD 370 billion; four of five international foreign direct
investments (exclude Japan) have flown to China mainland. According to
a recent investment preference survey with CEO of world top 1000
corporations measured by sales done by a international prestigious
consulting company, China has already taken the place of England, become
the second most preferred country for foreign direct investment only
after USA.
Traditional industry and new economic industry boomed together, china
now became the world giant of manufacturing industry. The output of
Semi-conduct, software development and other informational related
industry is soaring, china now is the third largest producer for
semi-conductor industry, and it still maintains the competitive
advantage in such labor-intensive industry as toys, fabric, garment and
shoe manufacturing. Furthermore, since the huge pool of cheap




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labor and land in underdeveloped inner rural areas, it will keep the
world competitiveness for a considerable amount of time, also as the
Per cap GDP approaches and exceeds USD 700, the domestic market will
take the place of foreign market for certain exported items to keep the
machine running in full capacity and the economy growing in sustainable
momentum.
The domestic currency, RMB, remains relatively stable, foreign
reserve passes the 200 USD billion levels. China now ranks the second
in the world in foreign currency reserve.
The city resident and farmers income level continue to grow at a
stable rate corresponds with their personal savings in the bank and
other credit association.

B. The sustainable substantial growth is the prominent feature of China economic

The internal elements support the growth is:
a. The domestic consumption and investment will grow with the continue
expansion of city and urbanization of rural area.
b. Property ownership structure reconstruction manifested by the
privatization of former public sector and the booming of private
enterprise driven by the industrious tradition of China people.
c. Industry reconstruction, the so called new economic will
transformed the old economic with the costless cross border
transfer of world class technology .The popularity of internet
usage in China and traditional preference for high education of
Chinese culture will combined to give a new definition for new
economic in China. For example, the online trading of securities
is predicted to grow at a rate comparable to Korea given the right
time and the introduction of healthy credit system.




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d. The tremendous economic potential in vast underprivileged but
resource abundant western region will give china economic another
space for boom given the condition of cleverly maneuvered incentive
policy and the well-orchestrated systematic market education for
local resident.
e. Middle sized and small sized enterprise will continue to
demonstrate a liberating growth spirit with the introduction of
healthy loan and credit system backed by the reorganization of
china major bank and the full operation of foreign bank in China
after WTO.
f. The quantity and quality of foreign direct investment will continue
to grow. The foreign investment in capital market will be opened
up in a foreseeable future.
g. The national human resource structure of china is well balance by
the abundant supply of both cheap labor and well-educated engineer
in high-tech sector.

China economic will be blessed with a new bliss after it becomes the
official member of WTO. According to the predication offered by the
economist in Morgan Stanley research institute in Hong Kong, by
conservative estimate, the growth rate of China economic in 2005 will
surpass 8% and will keep at the level of 9% from 2006 to 2015 if China
successfully fulfilled every obligation mandated by WTO upon its
members. After the initial suffering, China will be compensated with
the huge payoff from economic reconstruction. According to this
predicated growth figure, china economic will reach USD 10 trillion in
2020 (in 2000s dollar value), which is this years economic strength
of United States. At the same time, per cap GDP will reach




4
USD 6700. In one words, China will join the middle-income country rank
after it accomplishes its economic reconstruction in eye catching pace,
and its very possible that it will become the world second strongest
economic 20 years later.



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2. The challenges and historical opportunity
in China capital market

The opportunity as well as the challenge co-existed in todays china
capital market.

A. The Challenges:

(1) Lack of healthy individual as well as collective credit system in
china. There is no fully fledged Social security number system
attached to each resident and fully inter-connected with the bank
and securities market which can prevent the fraud and keep track of
each financial transaction record. And those recorded data is the
foundation for credit watching, statistics analysis and other
critical function provided by the supervision agency,
self-regulatory organization and individual financial firms.
Fortunately, China government has already begun to introduce such
ID system to reform its old one in some major cities like shanghai.
(2) The quality of listed companies: the public ownership still
dominated the corporate board since the government is always happen
to be the biggest shareholder of listed companies, then the
transparency and fairness of the management have often be threatened.
Information asymmetry is inevitable, Suspicious asset transfer
frequently takes place between the holding company and its listed
subsidiary. The book will be cooked since the corroboration with
accountant and public audit often will be rewarded without incurring
proportional risk. Small individual




6
Investors voice cannot be heard since seldom listed companies will
have strong incentive to put in place a strong investor relationship
program. Hence a vicious cycle is accomplished. The link is hard to
crack, nevertheless, this year CSRC has initiated several major
investigations in several high profile cases to clear up the market,
and several laws are also under the parliament approval procedure.
A delegation comprised of major china securities houses was led by
China Securities Company Association to visit Korean this October to
study the lesson learned by Korea through its IMF rescue program after
financial crisis. This year also see the burgling sign of private
sector listing, several companies wholly owned by private individual
had IPO this year, and in Shanghai alone, at least 14 foreign joint
ventures will plan to go to market next year.
(3) Lack of systematic coordinated securities Law and rule to regulate
the market and protect the investor. Previous regulation often is
outdated isolated and served as expedient contingency measure for
rising situation. So some of them often contradicted with each other
as the legal environment progress. Some regulation is opaque and
simply can not be enforced. For instance, the practice of trading
on inside information which will deeply shakes vital investor
confidence and demoralize individual investors, the law explicitly
prohibit this kind of activity, but the definition of inside
information is not well spelled out, and no standing supervision and
punishment mechanism is placed to expose and punish the illegal
activities. Now, the CSRC is strongly supporting the notion of
introduction a well-coordinated legal framework both in Investment
Company and other issues.
(4) High volatility in the A, B shares. The volatility cannot be well




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Captured by some math models since the wide spread price manipulation.
For instance, the beta coefficient used in the single index model of
CAPM is defined as the ratio of the individual securitys covariance
of return with the market to the variance of the market, in theory we
can use empirical study to calculate the expected return of the
individual security, Also security risk can be broken down into
systematic risk and specific risk, but since the price of the
individual security has been contaminated by force beyond the market,
so garbage in, garbage out, the result sometimes is misleading. The
data integrity problem is the major problem in emerging market not only
in China. If we can add other dimensional component into the risk
definition of China stock market, the so-called political risk should
be addressed before some prediction math model can be used. The fact
of high volatility in China stock market has been used by some scholar
to argue against the opening up of A shares to international investors
hot money, according this theory, portfolio managers might turn at
the first sign of trouble in a developing economy, and thereby further
disrupt its capital market during a period of financial stress.
Although such actions by mutual fund investors have not occurred in
US financial markets, some have suggested the high volatility of
emerging markets, coupled with the newness of their capital markets,
make them more susceptible to destabilizing investment inflows
relative to US capital market. But the fact is that, indeed, the normal
practice for money manager is to go opposite way with small investors.
They quite frequently bought shares at times when share price were
falling and sold in rising market, without a doubt, the hit and run
small investors in China has a lot to learn and benefit from the long
term investment objective of emerging market fund.
a) Besides the volatility issue typical of emerging market, the



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liquidity of China securities maybe more limited than the one in
developed markets, which means the liquidation price will be
compromised; brokerage commission, custodial fees and other
administrative fees are generally higher for foreign investments.
In addition, withholding tax would reduce the amount of income and
capital gains available to distribute to fund shareholders. Other
risks include the following: possible delays in the settlement of
transaction or in the notification of income, and even very remote
chance, the possible seizure, expropriation or nationalization of
the company. The tax related to the securities transaction in China
A B shares is so called transaction stamp tax, there is no capital
gain tax, the china government simply combined the income tax with
capital gain tax to prevent the tax evasion, by this November, the
stamp tax has been lowered from 0.3% to 0.2%, the 0.35% transaction
commission being levied on both side remained the same, even though
it will be expected to cut further. The market competition has
already force some securities brokerage use commission kickback
to lure the clients.

B. The opportunities resulting from the fundamental structure
reform of China stock market after WTO

The fundamental reconstruction of China stock market has been
manifested as following:

(1). from the perspective of the structure components and quality of
the listed companies in the market

a. Government begins to encourage the qualified private owned firm
to go to market. Differed from the closed management culture and



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reclusive ownership structure deeply imbedded in those family
businesses in Hong Kong, Taiwan and other Asia Counties, private
businesses in Mainland China are more likely to adopt the western
style corporate governance structure due to the short history
of growth, they are more adaptable to changes.
b. Foreign Joint venture goes public in China. Actually some big
international companies have already became major shareholder of lots
of the listed stated owned firms through stock purchase agreement with
china companies, especially in the airline industry, in the car
manufacturing industry, and in the transportation infrastructure
sector. Even in the historically strictly controlled financial service
sector, international capital has already began to chase their right
take over target, for instance, The International Finance Corporation
of IMF has already participated in the loan or equity structure of Min
Sheng Bank, Bank of Shanghai, Nanjing Commercial bank, New China life
insurance. Some domestic insurance companies also have attracted
substantial amount of foreign interest. Among above-mentioned
companies, some of them are listed firms; some of them are planning
their IPO. This year, only in Shanghai, there are at least one dozen
of foreign joint venture are under the IPO application procedure
initiated by local investment bank. The CSRC have already published
its policy directive in this Month to officially allow foreign firms
go public in China. As china capital market moves forward with better
regulation based on the force of market instead of arbitrary quota
system of planned economic, with better service provided by domestic
or partial foreign owned investment bank, more and more qualified
Foreign JV or wholly foreign owned firm will be able to tap the china
capital market.
Through the introduction of more and more private sector economic



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into China stock market, the ownership characteristic of listed
companies will be transformed from the public dominant to private
control. The market liquidity, depth and breadth will be enhanced
through the improvement of quality of listed companies. Good examples
of corporate governance structure will be set by those so-called new
firms to attract more capital inflow. Information asymmetry problem
will be addressed by better investor relationship program provided by
those new firms, dividend will be paid with due respect for the
individual investors, Investor confidence thus will be reassured to
encourage long term investment horizon. The resource allocation
function of capital market will be implemented with more efficiency
and effectiveness.

(2) From the perspective of market regulation environment
With the progressive merge of China market with world market,
inevitably, certain universal market rule of game will be adapted and
better observed to ensure a fair and just play for both buyer side and
seller side. These rules cover the independence and credit worthy of
public accountant and Auditor, the timely and accurate disclosure of
market information, prevention of fraud and market manipulation by
insider, the protection of small investors etc. A better and open
regulation environment certainly will improve the market efficiency
and cut the transaction cost, thus bring economic welfare as well as
social well being to the society. Furthermore, from the perspective
of certain investment policy restriction imposed by China government,
such as investment ceiling on certain industries, restrictive control
of currency exchange, prohibitive direct access by foreign investors
to A shares, all these strong control will be expected to relaxed
eventually to allow the market to take the free steer -wheel. With the



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media publicity of artificially inflated sales figures by some shell
companies this year, by the end of this November, CSRC published <
Informational Disclosure Regulation for Listed Companies---Financial
Statement and Note Presentation Measures>. In the accounting sector,
targeting at some wide spread malpractice, it covers the detail methods
for disclosure about revenues by business segment and by geographic
locations, revenue recognition method under different scenario, Loan
guarantee and Loan between affiliated companies, loan loss allowance
etc.

(3) From the perspective of institution investors in the market

Emerging market fund:
If we analyze the country preference of the emerging market fund by
comparing their individual country investment weight with their market
cap, we will find out that even though Mainland China did very well
in FDI, but it simply cannot catch the eye of these mutual fund managers.
Furthermore, even they happen to invest in mainland companies, most
of the emerging market fund only allocated small proportion in red chip,
H shares, Shanghai B shares and Shenzhen B shares combined usually take
less than 10% of the weight (this 10% is for mainland China fund only
play china, the figure will go much less for Asia Pacific regional fund).
But all these pessimism and
Mindset for downplaying China will be alleviated through the upgrading
of the Market system in China in near future. China stock market should
play hard to transform itself to earn the same level of respect and
popularity as received by FDI and it is certainly not as hard and as
time consuming we usually assume to be. Insurance Company will be
allowed to invest bigger proportion of its assets in securities to



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payoff the promised return for their Variable annuity or other
investment-related insurance policy. The employee investment program
similar to US 401k will likely be introduced to solve the huge social
welfare fund deficit. More money from the social protection fund and
housing public pooling fund will be allowed to participate in the stock
market through the bidding system to select best money manager instead
of sitting idle in a sleepy account or being swindled by some corrupted
manager. A regulation regarding to Asset Management business is in the
brewing stage which will legalize the estimated total 700 billion RMB
so called private collective fund in China (it is almost 40% of
marketable issues in China, the sheer volume speaks the great potential
for fund business in China)

(4) From the perspective of retail investor in the market
The market cap of china stock market is 4.8 trillion by the end of
2000; it is 57% of 2000 GDP. The fund asset is 84.7 billion, 1% of GDP,
and 10.3% of marketable share market cap. At the same time, domestic
resident savings in the bank have already surpassed 7 trillion, which
mean the retail side of the business still is a virgin land. The
official figure of retail account is 60 million, but the number has
to be deeply discounted due to three reasons, first, duplication
account is not discounted by CSRC, second, around half

of the 60 million are simply fake, third, large amount of them simply
opened for IPO and not active at all. So adjusting for duplicate,
inactive and fraudulent share accounts, one might estimate that China
has around 6 million to 9 million active individual investors, it is
only 0.5% of the total population,, and only 3 % of Chinas
approximately 200 million urbanities .The investors confidence has



13
been shattered by negative media exposure of book cooking and mutual
fund market corroboration scandal this year. Even the short term
results of market crackdowns is painful for many underprivileged small
investors, but the long term perspective still remain pretty rosy with
the overall improvement of market system and fundamental healthy of
china economic.

(5) From the perspective of investment instruments in the market
Among them, more open end funds will be introduced into the market,
corporate bond growth will set foot in China market to compete with
the IPO, rights offering and secondary offering, the stock index future,
stock option, ABS (home mortgage, car loan mortgage), credit
derivative, foreign exchange future and FX option as well as interest
rate future and option, SWAP and other derivative products will be
expected to show up in the market with unprecedented pace.

(6) From the perspective of CSRC and China Securities Company
Association
As more and more oversea returned Chinese joined the CSRC and other
regulation making bodies and self regulation agency, more and more
new ideas and concepts will be introduced to help China to establish
the foundation of the market---- the legal framework


C. The Policy Directive of foreign cooperation in China capital
market

The opening up of china capital market is the inevitable step China
should take to continue to develop its economic; China government
cannot afford to keep the door closed for its capital market.



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The progressive opening up of China market by sector is expected in
the foreseeable future. Financial service (commercial bank, insurance,
asset management, investment bank, securities brokerage),
Telecommunication, foreign trade, retail and whole-sale (distribution,
logistic), tourist, Accounting, Legal service, all these previously
strictly controlled industries will be readily available for foreign
investment.
The investment measure will be broadened from FDI to more efficient
and costless way of share participation, merger and acquisition. A new
wave of industry reconstruction will be expected in certain areas
through cross border M&A to achieve the better international resource
allocation. Foreign participation in state-owned enterprise would
help the establishment of fair corporate governance structure to set
a example for the rest economic. A Temporal Provision for State owned
Enterprise to reorganize equity structure Utilizing Foreign
investment has already been promulgated by China Economic and Trade
committee this year, it is an clear indication of the determination
of china government to push ahead its SOE privatization program with
more boldly manner.
The policy support for Non-public sector economic in the finance
service industry and telecommunication industry, the limitation for
private sector will be progressively lifted to allow the free market
to test the stronger and the fitter. The private property ownership
will be protected by law, thus can entrench the investors confidence.
Foreign capital investments in china private sector are expected to
become another hot spot in world financial world followed by many SOE
listings in the oversea market in the early and middle 90s.



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3. The horizon for China securities market
development

From the macro economic point of view, this years national GDP will
surpass 9 trillion, Foreign reserve will exceed 200 billion US dollar,
resident savings will break the 7 trillion level (only 10% has been
invested in the stock market), The savings in the banks is 14 trillion,
among them, 3.1 trillion is still sitting idle in the bank. A the same
time, the market capital in mainland china stock market reached the
level of 4.8 trillion by the end of 2000 (it is the 57% of GDP, but among
the 4.8 trillion, only 1/3 of them are marketable liquid). According
to the prediction of China marketable shares will meet 16.5% % of GDP
by the end of this year, and if the relevant market penetration ratio
and other ratio of developed market are applicable here in China, with
the assumption that we have well-functioned healthy capital market
system and legal system in place (investor protection scheme,
information disclosure scheme, independent credit worthy CPA and audit
system), then our market cap will expend 10 folds at present economic
level (even we assume that the state owned shares remain the same
proportion level and Foreign investment in B shares remain the same
level, or we assume the A share still close to the Foreign investors).
Take mutual fund for instance, this Octobers figure shows that the
market cap for China fund industry is 74.5 Billion, at the same time,
the asset value of China insurance companies totaled 400 billion, then
there is 61.6 billion of insurance companys asset could be invested
in the funds based on the official investment hurdle ratio of 15% of
insurance companys asset, but if we take the insurance companys



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investment ratio in developed market, the ratio can go as high as 70%.
From these rough estimates, we can see the huge potential in China
capital market.
In the primary market, in order to improve private firms access to
public equity, listing requirement will be expected to relax after the
abolishment of quota system on listing by

CSRC last march, also the expected establishment of the second Trading
board in next would have a profound effect on private equity markets
by enhancing the exit mechanism for those seed capital providers.
Proposed listing rules for the second trading board would make access
easier fir younger firms because companies would not have to demonstrate
a history of profitability to be listed, and the capital required to
obtain a listing is expected to drop from RMB 30 million to 20 million.

Because of above-mentioned situation, there are lots of China
companies and foreign companies have already teamed up to tap the market,
they are

Bnp Paribas Asset Management
Shroder Asset Management
Fortis Asset Management
HSBC
Detutsche Asset Management
Intesco Asset Management
J.P.Morgan Fleming
UBS Asset Management
----ABN AMRO




17
The list should be much longer.
The major concessions China has made in financial service industry
for joining the WTO.
Trading measure: Foreign entity can trade B shares without domestic
intermediate, foreign entity can apply and obtain special member seat
in the china stock exchange, after three years, foreign entity can trade
B shares, H shares, government bond, corporate bond and other new
instrument.
Primary market: first year foreign ownership can not exceed 33.33%,
after three years can reach 49%, the business can cover IPO of A, B,
H shares and government, corporate bond.
Asset management: first year foreign ownership can not exceed 33.33%,
after three years can reach 49%, business scope cover the relevant
operation of asset management.
Consulting and corporate advisory business: Credit inquiry, credit
rating and analysis, securities analysis, company valuation, M& A, MBO,
LBO and other corporate advisory service.
Finance informational provider: Financial data vendor, credit rating
entity, financial data analysis service provider like Lipper or other
companies.



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4. The Market potential for China investment
company industry

A. The assets of China fund
The assets of US mutual fund has reached 6.965 trillion US dollar by
the end of 2000, in comparison, China fund assets only 74.5 billion RMB,
the size difference is 800 times, mutual fund is the major market
investment vehicle, the pillar for US economic development. In
comparison, Chinas fund assets only take 2% of A share market cap, 1
% of GDP. Nevertheless, this year sees three open-end funds take off
in China market, the asset for the first one---Hua An Innovation Fund
---is 5 billion RMB, the Southern Conservative Growth Fund is 3.5
billion RMB, Hua Xia Growth Fund is just available to public 2 days ago.
The next year will see at least dozens of new fund come shore.

B. The popularity comparison of mutual fund between US and China
In china market, the quantity of security investment accounts totaled
60 million, the 3% of national population (the actual figure will be
even lower since the larger amount of account was opened through
borrowed ID by some institution investors, and huge amount of so called
sleepy account). The account number for mutual fund investor will be
much less. In comparison, an estimated 87.9 million individuals in 50.6
million US households own the majority of the mutual fund industrys
6.965 trillion in assets, as of year end 2000, they held 5.5 trillion,
or 80% off mutual fund assets, while fiduciaries---banks and
individuals serving as trustees, guardians




19
or administrators---and other institution investors held the remaining
$ 1.4 trillion, or 20%.




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5.Tianhe fund management Co., LTD Project

A. The Project background information:

Fully complied with Chinese government and CSRCs policy of
developing institutional investors, the project itself has won
unprecedented support from authority.
The excellent achievements ever made and the reputations ever earned
by project sponsors are sales points to attract future fund investors.
The products to be designed and marketed not only include stock fund,
but also bond fund and money market fund. We also plan to offer separate
account investment products for qualified institutions and /or high
net worth individuals based on their unique risk profile and investment
characteristics. The targeted separate account clients will be
insurance companies, employee pension, public social welfare fund,
housing fund, and other applicable institutional collective fund,
trust and endowment.
The sponsors of Tianhe fund management Co., ltd. had established many
branch offices in such developed areas as Shanghai, Zhejiang, Jiangsu,
Beijing, Nanjing, and Shenzhen. Furthermore, partner relationship with
China Construction Bank can help the fund reach nationwide market.
With the entrance of China into WTO, Tianhe fund management Co., ltd.
is actively exploring cooperation opportunity with a prestigious
international financial institution, and is now making exploratory
contacts with potential partners. The cooperation includes personnel

training, information sharing, technology support, product design,
security analysis, risk management, it will be a structured process,



21
the set up of joint venture fund management company will conclude the
whole process.
Well-planned step-by-step process will facilitate the communication
between potential partners and assure the success in the near future.

B. Project Structure

Major Shareholders
Tianyi Securities Co., ltd., an upcoming securities company in
China, has made rapid progress in recent years.
Xinda Investment Co., ltd., an established large trust investment
company in China, has solid financial foundation and business
performance
China yintai Investment Co., ltd., a large-scale investment
company in China, well versed in China financial market.
Suzhou Securities Co.,ltd., an emerging securities company, has
been among the leaders in online transaction.
Equity structure is well balanced.
The percentage of planned equity shares: tianyi 26%, Xinda 25%,
Yintai 25%, Suzhou 24%.
As shown above, no single company or two companies will be in
control position; this equity structure together with the
introduction of independent director is designed to ensure a better
corporate governance structure.
Registered capital for the time being is RMB 105 million. Once
policy allowed, foreign capital will be introduced.

The registered corporate address will be in Shanghai.
Business will be focused
We will extensively participate in inter-bank credit market, bond



22
repurchase market and stock loan market to manage the fund. Investment
strategy and investment decision will be well coordinated with the
investment objective of the fund; timely portfolio performance and
other relevant market sensitive information will be made readily
available through the placement of an investor relationship program.
Business Objective
The management will strive to achieve profession Excellency
through providing best products in the market to our clients. The
professional Excellency is defined as take full fiduciary duty, due
diligence and to is law abiding.
Corporate governance structure
Board of director will be comprised of 7 members, among them, 3 of
them will be independent directors, one director for each of four
shareholders, the selection, appointment, dismiss procedure will be
established and strictly followed. Membership of independent directors
will be given preference to outside professionals.
Management appointment
Fund managers appointment will be given preference to
experienced qualified professionals with outstanding track record
and impeccable integrity. The compensation system of developed market
will be introduced to ensure the performance.
Risk Control
As well as investment committee, a risk control committee also
will be established to review the major investment decision, a VAR
system similar to JP Morgan Risk Metric also will be implemented to
monitor the daily transaction impact in real time for better decision
making by management.



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6. Tianyi Security Co. Ltdthe major sponsor
of Tianhe Fund Management Co Ltd

A. The registered capital of Tianyi has reached RMB 1,002.06 million,
which is the biggest among all the security companies in Zhejiang
Province. Because of its sizes and good management, Tianyi receives
strong support from the government.
B. Tianyi is in the transformation process from a local security
company to a big national player, and its business is increasing very
quickly.
C. A number of listed companies and holding companies become major
share holders of Tianyi. This facilitates the corporate governance
reform of the company, and provides sufficient capital resource as
well.
D. There is a group of outstanding security analysis professionals
in Tian Yi Research Institute; The Company will continue to endeavor
to attract more talented employees. Human resource will back the
development of the company.
E. The branches of Tianyi are widely spread in Shanghai, Shenzhen,
Guangdong, Shangdong, Jiangsu, Zhejiang and other cities, thus its
business covers most prosperous areas of China.
F. Tian Yi will implement five corporate wise projects, i.e. expansion
project, innovation project, governance reform project, human
resource project and name brand project. The company has the
forward-looking management team, efficient management system and
rich enterprise culture;




24
G. Taking the advantage of the open-door policy of China security
market, Tianyi has initiated a series of cooperative plans with
foreign partners, and a number of plans are already under
enforcement.
H. Based on ten years distinguished achievement, Tian Yi will
continue to pursue the spirit of high-efficiency, creative and
trustworthy, and employ the strategy of developing core competency
employing a non-conventional development mode.



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7. Cooperative Plan for Tianhe Fund Management
Company Ltd.

A. Advantages of the cooperation
1) Right time
Chinese accession to WTO brings unusual good opportunities for the
development of security and fund market. Furthermore, significant
development of fund market has become necessary for China.
2) Right place
Tianhe will be located in Shanghai, the most prosperous city of China
and a potential international finance center. Moreover, since the
sponsors of the Company are all located in prosperous areas, such as
Beijing, Shanghai, Zhejiang and Jiangsu, there is close to market
advantage.
3) Right people
The high level management of all the sponsors will fully support
Tianhe; they keep amicable relation with the governments and banks,
as well as other relative institutions; Tianhe is bound to have
reliable customer resource.

B. Strategic market positioning
1) Advanced international investment practice.
2) Advanced management and operation mode
3) Diversified fund management business: advanced investment
management; unique products offering; powerful research capability;
and well trained sales team.
4) Business in both Chinese and international market




26
C. Cooperation plan
1) Preliminary communication to cultivate basic understanding of
cooperation.
a. Senior management personnel visit, undertaking preliminary
contact and communication.
b. Operation level personnel contact and further discussion,
exchanging relative information, security research papers.

2) Relative personnel training and business/technology cooperation
a. With the progress of communication, certain degree of understanding
will be reached.
b. A liaison group shall be established to facilitate further
cooperation, and to consolidate and deepen the earlier achievements.
c. Based on the work of the liaison group, a cooperation agreement
shall be made, to outline rights and duties of both sides. The
agreement shall include:

The foreign party will be expected to provide the training for the
personnel of the Chinese party on the technology of fund management,
such as asset allocation, security screening, portfolio
construction, risk award trade off, market timing, portfolio
rebalancing etc.
The foreign party shall provide all necessary technology assistance
to the Chinese party on the Companys management mechanism, fund
products designing, fund management technology, risk control,
marketing technology, and distribution channel and investors
relationship management.

The Chinese party shall, regularly or upon request of the foreign



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party, provide with the foreign party study reports on Chinese
economy and security market, and the relative market information.
The Chinese party shall provide all possible facilities to the
foreign party when they are undertaking the relevant business in
Mainland China.
The Chinese party shall give first priority to the foreign partner
for the stake ownership in the company as soon as the policy is
available.



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Contact Details:

Tianhe Fund Management Project Team
Address: 8F, No. 99 Beijing West Rd, Shanghai, PRC
Zip: 200003
Tel: (86) 21-3310-3222, 33103224
Fax: (86) 21-6319-3630, 63192854
Email: weigsong@hotmail.com
Contacts: Mr. Song Wei Guo, Mr. Zhu Dao Yi.