Fitch: Institutional Demand Boosts Chinese Investment Management Industry
Growth of Chinese investment management industry in 2015 was driven by all segments: mutual funds, mandates and subsidiary business. Mutual fund assets under management reached CNY7.9trn at June 2016 (USD1.2trn), a 78% increase from end 2014; mandates have more than doubled to CNY5.4trn, from CNY2.1trn over same period and subsidiary business surged to CNY11.1trn from CNY3.7trn at end 2014.
Capital fled equity funds into fixed-income products after the extreme stock-market volatility in June 2015. Money Market Fund (MMF), bond funds and balanced funds all registered strong growth since June 2015, while equity-fund assets shrank 60%. This was combined with some reallocation away from equity into balanced funds.
Institutional demand is increasing. Institutional investors now own 52% of mutual fund assets compared with only one quarter at end 2014, thus driving much of the growth seen in 2016 and 2015. This move was most pronounced in balanced funds and MMFs.
Guaranteed funds, a popular product since 2015, registered assets of CNY310bn as of end-June 2016, from only CNY24bn at end 2014. Fitch Ratings believes potential losses on these products at the end of their lives expose investment managers to substantial and growing contingent liability risk.
Banks are increasingly outsourcing the running of their Wealth Management Products (WMP) to Investment managers. Faced with a substantial growth of these products, they are looking for scalable and professional investment capabilities. This contributed materially to the mandates' assets growth. The majority of WMPs reside off-balance sheet and in practice banks face reputational risks over WMPs in case of default, and very few WMPs ever report a loss.
Over half of the assets in fund houses' subsidiaries are passively managed and they are mainly the less transparent channel businesses. Since subsidiaries are less regulated and free from capital provision requirements; channel business has been growing exponentially, which exposes asset managers to reputation risk in the event that such mandates have exposures to securities that default.
Demand is increasing amongst domestic investors to allocate assets offshore due to concern with market volatility, the slowing Chinese economy and prospects of a weaker yuan. Five northbound funds, Hong Kong funds approved for mainland distribution, had drawn CNY3.9bn as of end-July 2016 under the Mutual Recognition Fund (MRF) programme; the 42 mainland funds approved for Hong Kong sale drew only CNY66m.
China Securities Regulatory Commission (CSRC) has planned to tighten supervision on guaranteed funds and constrain the subsidiaries business, following the new rules on MMFs carried out in Dec 2015.The proposed new rules will help to make the guaranteed funds a safer product and rein in risk in subsidiaries business.