UPDATE 2-China approves new mutual funds to support stocks

(Adds details, comments, background)

By George Chen and Michael Qu

SHANGHAI, Feb 15 (Reuters) - China's securities regulator has approved the creation of at least three new mutual funds to raise more than 20 billion yuan ($2.8 billion), in an apparent effort to support the sagging stock market, sources said on Friday.

It is the second time in a month that Beijing has approved new funds to bolter the battered stock market.

China's benchmark Shanghai Composite index .SSEC has fallen by more than 25 percent since peaking in October last year, hit by sliding global markets and concern about heavy new supplies of domestic shares.

"The government knows the current level (of the stock index) is a key level to be supported. Otherwise, you will see more investors losing confidence in the Chinese stock markets," said a fund manager at a Sino-foreign fund house in Shanghai.

The asset management arm of Bank of China (601988.SS) (3988.HK) had won approval from the China Securities Regulatory Commission (CSRC) to raise roughly 10 billion yuan ($1.4 billion) to focus on domestic stocks, two fund industry sources who had been briefed on the situation told Reuters.

SPDB AXA Fund Management Co, a fund venture between Shanghai Pudong Development Bank (600000.SS) and French insurer AXA (AXAF.PA), had also won approval from CSRC to raise up to 7 billion yuan for a new fund to invest in Chinese stock markets, said the sources, who declined to be identified before an official announcement.

Bank of Communications Schroder Fund Management Co, a joint venture between Bank of Communications (3328.HK) (601328.SS) and UK asset manager Schroders (SDR.L), won CSRC approval to raise roughly 5 billion yuan for a bond fund, the sources added.

Bond funds in principle are allowed to invest mainly in the Chinese bond market but can also in some instances invest in Chinese new-share offers. Bond fund managers often seek investments in other markets, as the bond markets in China typically generate low returns.

Shanghai-based Bank of China Investment Management Co, in which Merrill Lynch MER.N unit BlackRock owns a 16.5 percent stake, declined to comment. A spokeswoman for SPDB AXA said she had no information on a new fund launch at the moment.

Bank of Communications Schroder could not immediately be reached for comment.

GOVERNMENT SUPPORT

Last month, the CSRC approved three new domestic equity funds to raise more than $2 billion as a boost to battered stock markets after an informal suspension of new stock fund launches for five months.

In June, a day after the Shanghai index sank more than 8 percent, the CSRC approved four equity funds worth 40 billion yuan in total, triggering a domestic stock market rebound as Chinese investors saw the move as a signal the government would not let its market crash ahead of this summer's Beijing Olympics.

Some analysts doubt recent moves will have the same effect.

"I don't think it would help stablise the market, although it's clear the government is taking some action to prevent the market from falling too much," said Jiang Jianrong, analyst at Shenyin Wanguo Securities Co in Shanghai.

"The size of the new funds is small and people are now finding it safer to put money in banks than in stocks." ($1=7.180 Yuan) (Additional reporting by Alex Wang and Samuel Shen in Shanghai; Editing by Lincoln Feast)