Retail enthusiasm drives China’s public fund assets to RMB 20 trillion by 2020, but huge retail demand for new funds raises bubble concerns
Assets in China’s mutual fund (public equity) industry surge 48% to a record RMB 20 trillion ($3.1 trillion) in 2020, but huge demand for new funds is raising concerns that erratic inflows of investor money could trigger a stock market bubble.
China is expected to develop into the world’s second-largest asset management market after the U.S. this decade, presenting huge growth opportunities for investment management firms.
UBS forecasts that mainland China’s mutual fund assets could reach $16 trillion by 2030. U.S. mutual funds currently hold assets totaling about $23 trillion.
New funds often have a hard Time attracting investors when they launch in the U.S. and Europe because many investors refuse to invest until the fund in question has a track record of at least three years and has reached $100 million in assets. Yet the opposite is true in China: asset managers are having trouble meeting the demand for new products.
New mutual funds launched in China last year attracted $389 billion in net inflows, a 90% increase over the net inflows attracted by new funds in 2019, according to Zeben Advisors. Meanwhile, the Chinese mutual fund industry grew from $2.1 trillion to $3.1 trillion in assets, according to the Shanghai-based consultancy’s calculations.
Demand for balanced funds that invest in stocks and bonds was particularly strong, with new funds attracting net inflows of $250 billion, well up from just $36 billion in 2019. Newly launched active equity funds attracted net inflows of $36 billion, up from $5.7 billion in the previous year, according to data from Zeben Consulting.
In total, new funds attracted about 80% of total net inflows to Chinese asset managers last year (excluding money market funds). But it may not be easy to retain that much capital either.
“Overactive fund buying and selling is a feature of China’s onshore investment industry,” said Peter Alexander, founder of Zeben Consulting.
Mobile trading is helping to drive frenzied inflows and withdrawals, as investors tend to quickly cash in on the early gains of a new product and move on to another new one.
Zeben Consulting estimates that 20 to 30 percent of the money raised by new active equity funds is redeemed within six months.
The strong investor demand for new funds continues into the early weeks of 2021, with fund managers seeing significant oversubscriptions ahead of the launch date.
E Fund Management’s (E Fund Management) latest offering, the E Fund Competitive Advantage Corporate Fund, broke a fundraising record for a Chinese fund manager by receiving $36 billion in subscriptions in one day. Its fundraising cap was $2.3 billion.
This level of interest is “not an isolated incident,” as 15 other funds reached their fundraising caps in one day in January, according to Zhang Lei De.
As of Jan. 19, new active equity funds launched during the month received $57.8 billion in subscriptions, but fund managers were limited to a cap of $27.8 billion. That’s as more fund managers are tightening restrictions on subscriptions and rejecting big ones in an effort to rein in the frenzy of retail investors.
It’s not clear if such measures will work, as regulatory changes are pushing in the opposite direction.
Stricter rules on wealth management products sold by banks and wealth management firms have encouraged more retail investors to invest their savings in mutual funds, said Kelvin Chu, an analyst at UBS in Shanghai.
“In the long run, we expect more household financial assets to be invested in mutual funds,” Chu said.
London-based consultancy CrossBorder Capital estimates that China alone will provide nearly a third of the $22.7 trillion global liquidity surge caused by the world’s major central banks opening the monetary floodgates in 2020 to stop a new crown Epidemic from destabilizing financial markets. one-third.
“There is a correlation between high liquidity ratios and future increases in stock prices,” said Michael Howell, founder of CrossBorder. The firm is now advising clients to buy Chinese A-shares.
A senior adviser to China’s central bank warned last week that the risk of asset bubbles will increase if the central bank doesn’t tighten monetary policy. Ma Jun, a member of the Chinese central bank’s monetary policy committee who worked at the World Bank and the International Monetary Fund (IMF), made the remarks before the Shanghai Composite Index rose 34% since hitting a 2020 low in late March last year.
The Shenzhen Stock Exchange’s Growth Enterprise Market (ChiNext) index, which focuses on technology stocks, rose 49 percent in the same period, attracting a large number of retail investors.
“China’s central bank is clearly worried about a bubble, given that Ma Jun has publicly mentioned it. China’s stock market rally so far is alarming, and (stocks) look in a vulnerable position if vaccinations don’t go well,” said Freya Beamish, chief economist for Asia at consultancy Pantheon Macroeconomics. Beamish) said.
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