Interest in China's once lucrative mutual fund sector wanes

Western firms taking a wait-and-see attitude as sector loses 75 billion yuan in third quarter amid crisis of confidence on Shanghai market

PUBLISHED : Monday, 12 November, 2012, 12:00am
UPDATED : Monday, 12 November, 2012, 4:27am

The exit of ING Group from one of the mainland's earliest securities investment joint venture marks overseas players' waning interest in the once-vaunted mutual fund market.

The Dutch financial company recently sold its 33 per cent of China Merchants Fund Management to two Chinese partners - China Merchants Bank and China Merchants Securities - for US$128 million.

The deal marked a watershed for the fast-growing mainland mutual fund sector, which is grappling with a crisis of confidence as the key Shanghai stock index flounders.

"The days of easy money are over," said Howhow Zhang, chief researcher at fund consultancy Z-Ben Advisors. "It seems only Asian institutions are still interested in China's mutual fund industry while Western companies are taking a wait-and-see attitude."

According to TX Investment Consulting, Chinese mutual funds lost a combined 75 billion yuan (HK$92.4 billion) in the third quarter of this year in step with the market slump.

They posted a loss of 510 billion yuan last year, when the market dived 21.7 per cent.

Among the mainland's 66 mutual fund management firms, 37 were Sino-foreign joint ventures as of the end of last year. Overseas investors are subject to a 49 per cent investment cap in joint-venture funds.

Foreign institutions lined up to set up joint ventures with Chinese companies after Beijing liberalised the sector in 2002. ING was among the first as it obtained an approval to create the China Merchants Fund.

Other big-name institutions, such as Deutsche Bank and JP Morgan, had also gravitated to the mainland market, where millions of retail investors tend to put their years of savings in securities investment funds.

The mutual fund sector saw huge growth in 2007, benefiting from a 97 per cent jump in the benchmark Shanghai stock index, with mutual funds' total assets more than tripling to 3.3 trillion yuan that year.

That performance and the bullish outlook on China's equity sector encouraged more foreign firms to join the gold rush as they looked to cash in on the country's growth story.

In 2008, Deutsche Asset Management, a subsidiary of Deutsche Bank, increased its holding in Beijing-based Harvest Asset Management to 30 per cent from 20 per cent.

The mainland's stock market is notorious for retail investors looking to make a fast buck by betting on volatile stocks, often on the basis of rumours and tips.

The China Securities Regulatory Commission (CSRC) set about developing mutual fund houses partly to add a touch of professionalism to this casino-like stock market, advocating individual players to invest in mutual funds.

However, a raft of scandals involving insider trading by fund managers in the past two years has dented the repu- tation of the sector while the funds' woeful performance during a bear run between 2010 and 2012 has sapped investors' interest.

ING's decision to sell its stake in China Merchants Fund mainly stemmed from its need to generate funds for repaying part of the bailout money it received from the Dutch government during the 2008 financial crisis. But an executive with a Shanghai-based fund house said the worsening market sentiment in China was also a driving force.

Analysts said more foreign companies would consider quitting the mainland market as there seems to be no escape from the bears.

Unlike their Western counterparts, mainland mutual funds are allowed to invest only a small portion of assets in stock index futures or short-sell, denying them important hedges against market downturns.

Under mainland rules, stock-focused mutual funds have to invest no less than 60 per cent of their total assets in stocks while the value of their short positions cannot exceed 20 per cent of their stock holdings.

Chen Li, UBS Securities' head of China equity research, said funds will continue to struggle unless the regulator allows them to freely participate in short selling.

"If the regulator fully lib- eralises short selling, it would offer chances to the funds to make profits even in a down market," he said, "and then more capital will flock to the market."