Shanghai Pudong will cooperate with French financial firm AXA SA and Shanghai Dragon Investment Co Ltd to establish the joint venture, with Shanghai Pudong holding a controlling stake of 51 percent, according to the bank's announcement to the Shanghai Stock Exchange (SSE).

"The fund management joint venture will expand our service range and deepen the integrated service," said Shen Si, secretary of Shanghai Pudong board of directors, adding that the joint venture still needs approval from the China Securities Regulatory Commission.

Shanghai Pudong, part of the second trial batch of banks to set up fund management companies, submitted its application last year along with the Agricultural Bank of China, Bank of China and China Minsheng Banking Corp Ltd. Shanghai Pudong posted net profit of 3.35 billion yuan (US$431 million) in 2006, an increase of 31 percent on the previous year.

Analysts said the fund management joint venture would increase the bank's income from fee-based intermediate services, which accounted for only 5 percent of its total revenue in 2006.

"It will help banks to increase their investment gain, thus adding to their income from intermediate services," said Zhao Xinge, a professor from the China Europe International Business School.

Qian Kun, an analyst at Changjiang Securities, said intermediate services that generate fee-based income would be a focus for mainland banks, which are trying to catch up with their foreign counterparts in diversifying the income base from loans.

Compared with professional fund management companies, banks have the advantage of an extensive network and a large customer base, said Qiu Zhicheng, an analyst at Haitong Securities.

Zhao agreed, but warned of unequal competition with fund management companies because of their size and reach. Banks could be expected to concentrate on pushing their own fund management products while neglecting those of the fund management companies, he said.

"They cannot guarantee equality in promoting fund products, though the problem has not appeared during the bullish fund market in 2006," said Zhao. The SSE Fund Index saw an accumulated increase of 148.82 percent in 2006.

The first trial batch of banks, including Bank of Communications and China Construction Bank, currently manage 11 open-ended funds.

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