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China’s $4.4tn mutual fund industry has become the latest target of President Xi Jinping’s crackdown on finance, with new laws limiting fees and funds now subject to tougher and more frequent inspections.
Under new rules that took effect last month, mutual fund houses have to reduce fees for both passive and active products. Fund managers are also barred from purchasing third-party services such as external expert consultancy.
Funds also face on-site audit checks, with the National Audit Office starting a two-month inspection of the accounting books of more than 10 leading mutual fund houses in June. Since late last year, securities regulators have closely monitored the trading activities of top mutual fund managers by size, requiring daily trade reports if net sales occur.
Xi has repeatedly emphasised the importance of “new quality productive forces” such as technology and manufacturing over finance, as part of a nationwide campaign for “high-quality development”. He has also espoused “common prosperity”, a philosophy that has coincided with a crackdown on bankers and their excesses.
The mutual fund industry reported a loss of Rmb492.8bn ($69bn) for investors in 2023, following an even larger loss of Rmb1.47tn in 2022, according to Wind data. Despite a strong inflow into bond-linked funds this year as sovereign bonds rally, equity-linked funds have been hit by a tepid stock market performance.
The country’s estimated 6,000 mutual fund managers, most of whose funds track mainland equities, have been scapegoated for the poor performance of mainland stocks, which are hovering at a five-month low.
Dozens of high-profile fund managers have left their jobs in recent months, with the increased turnover leaving the industry dominated by younger, less experienced, less performed managers, analysts say.
At least 204 fund managers from 113 Chinese asset management firms have stepped down in the past seven months, according to Wind. This compares with the roughly 170 managers that stepped down in the same period in each of the past three years.
The current regulatory environment has deterred funds from building up “so-called star fund managers”, said Jessie Zheng, an analyst with Shanghai-based consultancy Z-ben Advisors, as these individuals then attract pressure when markets turn. “Active equity fund managers are under pressure in particular due to weak performance and substantial redemption risk,” Zheng said.
China’s mutual funds have traditionally charged higher fees than their peers in developed markets. The average was 1.43 per cent of fund assets, according to an estimate by domestic brokerage Tianfeng Securities, compared with less than 1 per cent in the US, according to Morningstar. In anticipation of laws introduced last month, many have now cut their fees to closer to 1 per cent.
E Fund, the largest mainland mutual fund house by size, has reduced management fees for most of its equity-focused funds to 1.2 per cent of fund assets from the previous 1.5 per cent.
Similar moves have been seen at rivals such as China Asset Management, Bank of Communications Schroder Fund Management and Zhong Ou Asset Management, partly owned by US private equity group Warburg Pincus.
Last month, Qiu Dongrong left Zhonggeng Fund Management, one of China’s so-called superfunds. Rumours of his departure had triggered redemptions as far back as April. Zhonggeng’s funds under management shrank 26 per cent by size to Rmb14.7bn in the second quarter of 2024, according to its filings.
“The mutual funds did well in previous years because there was a positive feedback loop involving manager pay, newly attracted funds, and share prices,” said a Beijing-based manager of a top mutual fund. “But that pattern is breaking down,” he added.
Managers had previously received large rewards for managing superfunds, but “with pay cuts and other crackdown on fees, managers’ obsession with the scale of assets under management starts to fade”, said a Shanghai-based fund manager.