Assets under management in China’s mutual fund industry surged 48 per cent to a record US$3.1-trillion in 2020, but huge demand for new funds is stoking fears that volatile investor inflows could spur a stock market bubble.
China is expected to develop into the world’s second-largest asset management market after the U.S. this decade, providing a huge growth opportunity for investment managers.
UBS Group AG forecasts mainland China mutual fund assets could reach US$16-trillion by 2030. Assets held in U.S. mutual funds currently stand at about US$23-trillion.
New fund launches in the U.S. and Europe often struggle to attract investors who refuse to make commitments until a three-year performance record is available and a US$100-million pot of assets is established. However, the opposite is true in China, where asset managers are struggling to satisfy demand for new products.
New mutual funds launched in China last year attracted net inflows of US$389-billion, up 90 per cent on allocations to debuts in 2019, according to Z-Ben Advisors Ltd., a Shanghai-based consultancy that also tallied the rise in the country’s mutual fund industry from US$2.1-trillion to US$3.1-trillion.
Demand was particularly strong for balanced funds that invest in both stocks and bonds for which allocations to new launches reached US$250-billion, up from just US$36-billion in 2019. Newly launched active equity funds pulled in US$36-billion, up from US$5.7-billion a year earlier, according to Z-Ben.
About 80 per cent of the total net inflows (excluding money market funds) gathered by Chinese asset managers last year was captured by new launches. But retaining the cash can also be problematic.
“Hyperactive fund churn is a feature of the onshore investment industry,” says Peter Alexander, founder of Z-Ben.
Trading on smartphones is helping drive frenetic inflows and withdrawals as investors often take profits swiftly on early gains from a new launch and jump into another product debut.
Z-Ben estimates that between 20 per cent and 30 per cent of the cash raised by new active equity funds is redeemed within six months.
Investor appetite for new funds has continued in the opening weeks of 2021 with fund managers seeing massive oversubscriptions ahead of launch day.
E Fund Management Co. Ltd. shattered the fundraising record for a Chinese manager after receiving orders worth US$36-billion in a single day for its newest product, E Fund Competitive Advantage Enterprise Balanced Fund. It was capped at US$2.3-billion.
Mr. Alexander says that level of interest was “not an isolated event” as a further 15 funds had also sold out in a single day in January.
New active equity funds launched last month received subscriptions worth US$57.8-billion by Jan. 19, but actual capital raised was limited to US$27.8-billion by managers. That’s because more managers are imposing tighter limits on subscriptions and rejecting big-ticket orders to try and control the fever among retail investors.
Whether such measures will work is unclear because regulatory changes are pulling in the opposite direction.
Kelvin Chu, an analyst at UBS in Shanghai, says tighter rules covering wealth management products sold by banks and wealth managers have encouraged more retail investors to invest their savings in mutual funds.
“We expect more household financial assets to shift into mutual funds over the long term,” Mr. Chu says.
CrossBorder Capital Ltd., a London-based consultancy, estimates that China alone supplied almost one-third of the US$22.7-trillion surge registered in global liquidity in 2020 as central banks turned on the monetary taps to prevent the coronavirus pandemic from destabilizing financial markets.
“High liquidity ratios are associated with future increases in equity prices,” says Michael Howell, founder of CrossBorder, which recommends China A shares as a “buy” to clients.
A senior advisor to China’s central bank warned this week that the risk of asset bubbles would increase if monetary policy was not tightened. The comments by Ma Jun, a member of the monetary policy committee of the People’s Bank of China (PBoC), who has also worked at the World Bank and International Monetary Fund, followed a 34-per-cent rise for the Shanghai Stock Exchange Composite Index since its 2020 low in late March.
The tech-focused ChiNext Index has rallied 49 per cent over the same period, drawing in retail investors.
“The PBoC clearly is worried about bubbles, given Ma Jun is speaking openly about it. The rally in Chinese stocks has been alarming and [the equity market] looks exposed if the vaccine rollout doesn’t go smoothly,” says Freya Beamish, chief Asia economist at Newcastle upon Tyne, Britain-based economics research consultancy Pantheon Macroeconomics.
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