China is taking steps to revamp its US$4 trillion mutual fund industry amid stunning losses, decrying the pursuit of short-term results and celebrity status after the local stock market suffered the biggest blow in the region last quarter.
Mutual funds must prioritise investors’ long-term interests, prevent obsession with size and rankings and seek greater participation from the financial sector, the China Securities Regulatory Commission (CSRC) said in a statement on its website late on Tuesday. The regulator also encouraged banks, insurers and brokerages to enhance participation in the sector.
“The guidelines are aimed at tackling the disorderly expansion of capital [and improve competition],” said Wei Fengchun, chief economist at Shenzhen-based Truvalue Asset Management.
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He noted that the measures come against the background of inappropriate management of some mutual funds, which has led to the pursuit of short-term performance and preference for large scales. “[This] could cause market instability and possibly spread the risks [to the wider financial industry],” he said.
The message came as the industry has mushroomed into the world’s fourth largest, with 9,491 funds overseeing 26.34 trillion yuan (US$4 trillion) of assets at the end of February, according to data from the Asset Management Association of China.
At the same time there have been complaints from investors about huge equity losses. The industry recorded 1.34 trillion yuan of losses in the first quarter, as the Shanghai Composite Index fell 10.7 per cent in the first quarter. The drop has since widened to about 19 per cent through April 27, making it the worst performer among major benchmarks in Asia-Pacific.
With market losses deepening, media reports said there is a growing possibility of a wave of redemptions as investors look to curb their losses.
The CSRC said mutual funds “should abandon their short-term pursuit of achieving [large] scale and rankings.” Funds should take measures to tone down the hype surrounding portfolio managers as stars and take measures to curtail entertainment-oriented product marketing, it added.
“The risk-control level, long-term investment performance for at least three years and actual profit of investors should be included while considering the performance” of portfolio managers and other core employees, the market watchdog added.
The measures are aimed at protecting retail investors who increasingly rely on professional money managers to invest their savings in the financial markets.
The CSRC also said it will reduce restrictions on the number of licensed mutual funds that banks, insurers and security firms can own, and will guide underperforming funds to be deregistered or be absorbed into another fund via mergers and acquisitions.
“The competition will speed up,” Wei said. “The cooperative relationship between mutual funds and other financial institutions such as banks, insurers and securities companies will become more of a competitive one.”
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