Financial Liberalization Gives a Big Boost to Chinese Fund Managers

Financial liberalization is starting to pay off for China’s fund managers.

Regulatory reforms launched by the authorities after the 2008 financial crisis have encouraged state-run companies to issue bonds and increase annuity investments for their pension funds. These moves have created strong demand for fixed-income funds, industry executives say.

At the same time, regulators have allowed the country’s 85 registered asset management firms to introduce a range of new products tailored to China’s retail investors. These include low-risk investments such as index funds and short-term money-market-type funds promising annual yields of 4 to 6 percent; they compete with wealth management products offered by banks.

These initiatives have turned the trickle of funds flowing into the industry in recent years into a torrent. Assets of the China 20, Institutional Investor’s exclusive ranking of the mainland’s largest fund management firms, surged by 24.8 percent, or $78.1 billion, in the 12 months ended March 31, to a total of $393 billion. That growth represented a dramatic change from the previous year, when assets grew by just 2.9 percent.

For fund managers bigger is apparently better. Nearly half of the asset growth went to the top three firms on the China 20: China Asset Management Co., Harvest Fund Management Co. and E Fund Management Co. China AMC increased its assets under management by 35.9 percent, to $55.5 billion; Harvest posted a 39.1 percent jump, to $50.5 billion; and E Fund reported a 25.5 percent rise, to $37.5 billion.

Although the biggest firms enjoyed the largest growth in absolute terms, medium-size managers posted some of the strongest growth rates. ICBC Credit Suisse Asset Management Co. boosted its total by 45.4 percent, to $21.9 billion, in the latest year; it advances two places to sixth in the ranking. Even more dramatic, China Universal Asset Management Co. jumps five places to ninth thanks to a 65.9 percent jump in assets under management.

“The midsize companies are growing very fast” and are beginning to challenge the industry’s dominant players, says Lillian Zhu, research manager for Z-Ben Advisors in Shanghai.

Hu Yifan, chief economist in the research division of Haitong International Securities Group in Hong Kong, notes that the industry had experienced very little growth in previous years. “Chinese regulators imposed a lot of constraints,” she explains.

Bureaucratic strings started loosening, however, after the appointment of Guo Shuqing as head of the China Securities Regulatory Commission in late 2011. In December the CSRC said it would allow management companies to make online applications for new-product licenses. It also capped the prelicensing examination period, which in the past could take months, at 20 working days. The more liberal stance, which reflects a change of attitude rather than a wholesale overhaul of rules, has continued under Xiao Gang, a former Bank of China chief who succeeded Guo in March. Asset managers have been quick to respond.

The new regulatory stance “was a policy bonus” for managers, Hu says. “The products are more diversified, so they can raise money quite quickly.”

Growth leader China Universal attributes much of its success to the launch of a money market fund aimed at retail investors, called Xianjin Bao (Cash Treasure). The firm introduced its first, 30-day product in May 2012 and has since expanded the range with products maturing in 14, 28 and 60 days. “We wouldn’t have even thought of this” if the regulator hadn’t taken a more liberal stance, says an executive at China Universal, who spoke on condition of anonymity.

Fund managers are also benefiting from regulatory moves opening the Chinese equity market to greater foreign participation. Under the renminbi qualified foreign institutional investor (RQFII) program, the authorities have allowed Hong Kong subsidiaries of asset managers to raise money in the offshore renminbi market for investment in mainland-listed A shares. In November the CSRC increased the total quota for RQFII funds to 270 billion yuan ($43.9 billion).

The authorities have awarded a total of 127.8 billion yuan in quotas to 44 firms. China AMC leads with a quota of 21.8 billion yuan. Other big players include E Fund (18.7 billion yuan), Harvest (9.25 billion yuan) and Hua An Fund Management Co. (3.9 billion yuan).

This year Beijing has broadened the RQFII program to allow banks and insurers to participate. And in something of a reciprocal move, the authorities over the past year have opened up the qualified foreign institutional investor program, which was initially designed for foreign fund managers, to domestic firms.In November, Harvest, through its Hong Kong subsidiary, became the first mainland fund manager to win a QFII license. It obtained a $1 billion quota from the State Administration of Foreign Exchange, the central bank arm that oversees the program, in March. China AMC, E Fund and Bosera Asset Management Co. have each won a $1 billion quota in recent months. Fixed-income funds and index funds tied to the CSI 100, CSI All Share and CSI Consumer Staples indexes have been popular, says an executive at one high-ranking firm, who asked not to be named because she is not authorized to speak to the media. “The market is quite volatile, so investors prefer a more stable target,” she says.

A fast-growing bond market, which the government has been promoting as an alternative to bank lending, is supporting the growth of fixed-income funds. Bond issuance rose to $1.4 trillion in 2012, up 11.6 percent from the year before, according to the state-run China Central Depository & Clearing Co. Corporate bonds deposited with CCDC soared 160 percent in 2012, to $105 billion.

Bosera, which slips one notch to No. 4 this year despite a 16.8 percent increase in assets, announced in April that it had raised $729 million for the Bosera Anying Bond Fund, its first actively managed short-term corporate bond fund.

GF Fund Management Co. has launched 12 new funds since September 2012, including GF Polyurethanes, a bond fund focusing on companies in China’s chemicals industry. It has raised 3.3 billion yuan.

Fund managers welcome the growth in assets, but the industry continues to face pressures. Z-Ben’s Zhu estimates that total management fee income in the industry fell to $4.24 billion in 2012 from $4.72 billion a year earlier. “One main reason AUM is growing is fixed-income products, and fixed-income product fees are low,” she says.

Reform can be a double-edged sword. Regulators are working on plans to let securities brokerages compete directly with established fund managers for asset management business. Members of the China 20 can’t afford to relax. As Hu says, “The competition is becoming more serious in this market.” • •