China’s $4.4 trillion mutual fund industry has recently come under intense scrutiny as President Xi Jinping’s government intensifies its crackdown on the financial sector. New regulations aimed at reducing fees and increasing oversight have put the industry under significant pressure, marking a notable shift in China’s approach to managing its financial markets.
Stricter Regulations and Fee Reductions
New rules, which came into effect last month, require mutual fund companies to lower fees for both passive and active investment products. Additionally, fund managers are now prohibited from purchasing third-party services, such as external consultancy, which had previously been a common practice.
The regulatory environment has also grown more stringent, with the National Audit Office initiating a two-month audit of the accounting records of over 10 leading mutual fund companies in June. Since late last year, securities regulators have heightened their surveillance of top mutual fund managers, particularly focusing on those managing the largest portfolios. These managers are now required to submit daily trading reports whenever there are net sales.
A Shift in Focus: From Finance to “High-Quality Development”
President Xi has consistently emphasized the need to prioritize “new quality productive forces,” such as technology and manufacturing, over the finance sector. This approach is part of a broader national campaign aimed at achieving “high-quality development.” Xi’s philosophy of “common prosperity” has also played a significant role in the ongoing crackdown on financial excesses, particularly targeting high-profile figures in the banking and finance industries.
Mounting Losses and Market Struggles
The mutual fund industry’s performance has been less than stellar in recent years. In 2023, the industry reported a loss of Rmb492.8 billion ($69 billion) for investors, following an even larger loss of Rmb1.47 trillion in 2022, according to data from Wind. While bond-linked funds have seen strong inflows this year due to a rally in sovereign bonds, equity-linked funds have struggled, hampered by a sluggish stock market.
With around 6,000 mutual fund managers in China, many of whom manage funds tied to mainland equities, the industry has been blamed for the poor performance of these stocks. The Shanghai Composite Index, a key benchmark, has hovered at a five-month low, exacerbating the challenges faced by fund managers.
Exodus of Experienced Fund Managers
The increased regulatory pressure has led to a significant turnover within the industry, with dozens of high-profile fund managers leaving their positions in recent months. This exodus has left the industry increasingly dominated by younger, less experienced managers, a trend that analysts say could impact the overall performance of the sector.
According to Wind data, at least 204 fund managers from 113 Chinese asset management firms have stepped down in the past seven months. This number represents a noticeable increase from the roughly 170 managers who left during the same period in each of the past three years.
The Decline of Star Fund Managers
The current regulatory environment has discouraged the development of “star fund managers,” who were previously celebrated for their ability to attract large inflows and deliver strong returns. According to Jessie Zheng, an analyst with Shanghai-based consultancy Z-ben Advisors, these high-profile managers now face increased pressure when markets underperform, making them less desirable in the eyes of both regulators and investors.
“Active equity fund managers are under particular strain due to weak performance and the substantial risk of redemptions,” Zheng noted.
Fee Cuts and Industry Adjustments
China’s mutual funds have historically charged higher fees than their counterparts in developed markets. On average, these fees were 1.43% of fund assets, according to domestic brokerage Tianfeng Securities, compared to less than 1% in the U.S., as reported by Morningstar. However, in anticipation of the new regulations, many fund companies have reduced their fees to closer to 1%.
For instance, E Fund, the largest mainland mutual fund company by assets, has lowered management fees for most of its equity-focused funds from 1.5% to 1.2% of fund assets. Similar fee reductions have been implemented by competitors such as China Asset Management, Bank of Communications Schroder Fund Management, and Zhong Ou Asset Management, which is partly owned by U.S. private equity group Warburg Pincus.
High-Profile Departures and Market Impact
The departure of key figures in the industry has also had a ripple effect on the market. Last month, Qiu Dongrong left Zhonggeng Fund Management, one of China’s so-called superfunds. Rumors of his exit had triggered redemptions as early as April, leading to a 26% decline in the size of Zhonggeng’s funds under management, which fell to Rmb14.7 billion by the second quarter of 2024.
“The mutual fund industry thrived in previous years due to a positive feedback loop involving manager compensation, newly attracted funds, and rising share prices,” said a Beijing-based manager at a leading mutual fund company. “But that pattern is now unraveling.”
Managers who previously enjoyed significant rewards for managing superfunds are now facing pay cuts and increased scrutiny. “With the crackdown on fees and reduced compensation, the obsession with managing large-scale assets is beginning to wane,” a Shanghai-based fund manager observed.
Conclusion
China’s mutual fund industry is navigating a challenging period marked by increased regulation, fee reductions, and a high turnover of experienced managers. As the sector adapts to these changes, the focus is shifting away from building “star” managers and towards a more conservative and regulated approach to fund management. The long-term impact of these changes on the industry and its investors remains to be seen.
