Inflows into Chinese mutual funds surge, with new issuance topping $370 billion

BEIJING — Chinese mutual funds have been on a tear this year, a sign of changing investor behavior as the local capital markets mature.

More than 1,100 new funds have launched this year, for a scale of issuance that’s topped 2.5 trillion yuan ($373.1 billion) as of Friday, the last trading day of October, according to data from the Wind financial information database.

The 2.5352 trillion yuan figure is a historic high — far more than the 1.4 trillion yuan and 1,036 funds for all of last year, according to Wind.

China’s mutual fund market (2001-2020)

Note: 2020 figures are for the year through the end of Oct. Source: Wind.

Analysts pointed to several reasons for the surge in investor demand.

Lower interest rates from global monetary policy easing in the wake of the coronavirus pandemic have freed up capital, and made stocks relatively more attractive. Changes in Chinese regulation and investor preferences in the country have also helped drive the latest growth in Chinese mutual funds.

Topping 2.5 trillion yuan is a very important step from a historical perspective, even if the figure isn’t that large in the context of China’s market overall, said Ji Shengling, an analyst with China Asset Management.

With recent new initiatives such as the launch of the STAR board last year and its registration-based IPO system, there are “lots and lots of green lights” from regulators for greater development of the equity market, Ji said, according to a CNBC translation of his Mandarin language remarks.

China boasts the world’s second largest stock and bond markets, but most Chinese people have preferred to save their earnings or buy real estate. Speculators have tended to drive stock performance, earning the mainland markets the nickname of a “casino” in past years.

There’s been a “mega shift” of funding from unregulated shadow banking-oriented wealth management products toward the capital market, said Cliff Sheng, partner leading the capital market service line of McKinsey in greater China.

Sheng added that after years of efforts to improve investor education among consumers, institution-managed products have increased their penetration.

Foreign fund managers such as Fidelity International and Vanguard have been stepping up their efforts to tap this trend, helped by regulatory support and collaboration with local financial and technology institutions such as Alibaba-affiliate Ant Group.

Ant became a pioneer in China’s wealth management industry with its mobile payments app-linked money market fund “Yu’e bao.” The product had around 1.7 trillion yuan in assets under management at its peak in early 2018, before losing its luster with the rise of other funds and more stringent regulation.

Trends in China can fade quickly. A slew of investment funds, many claiming to be driven by cutting edge technology, cropped up in the last several years, but many collapsed amid regulatory crackdown.

Ant Group’s plans for a record initial public offering with a dual Hong Kong and Shanghai listing on Thursday came to a halt two days before the debut. The Shanghai Stock Exchange said it suspended the IPO after central government regulators met with Ant controller Jack Ma and key executives.

Funding to Asia-based fintech companies dropped further in the third quarter by 12% from the prior three months, and 60% of the top deals took place in the U.S., according to data released this week by CB Insights.

 “The Chinese market is maturing, as seen by Ant Group and Lufax’s recent IPOs,” Conor Witt, analyst at CB Insights, said in an email. “The drop off in funding may also represent a cyclical pullback following significant funding growth in 2018. There are still large opportunities in the Chinese market, but the barriers to entry are heightened as later stage players have increased their market share in recent years.”

For the latest rush of mutual funds, similar prudence is warranted.

“(It’s) a clear opportunity for most mutual fund companies and managers, especially for those with (a) good track record, strong distribution network and established brand name,” Sheng said. But he said funds may need to adopt new management models in order to sustain the scale of assets under management.

Mainland Chinese stocks are among the best performing in the world this year. The Shanghai composite has gained 7.3% so far this year and the Shenzhen component has soared more than 30%, while the S&P 500 is up nearly 4.3% and Japan’s Nikkei 225 is holding onto a half percent gain.

Shanghai led global markets by the number of initial public offerings in the first three quarters of the year, according to data from Ernst and Young.

Particularly in China, a number of industry developments this year from electric vehicles to health care have given investors a variety of attractive reasons to buy in, Ji said. The rapid run-up in stock market growth has increased the level of risk in the short-term, and he expects some pullback.

Still, Ji said he is confident in the longer-term picture that more funds will be keen to tap.

Details on the 14th Five-year Plan indicate China will put further emphasis on technology, health care and other recently established themes going forward, Ji said.

“China’s investment trend in the next 10 years won’t have a very big change” he noted.