China Alert: China’s mutual fund market now second largest in Asia. Soon to be #1.

• Continued bank disintermediation has driven China’s mutual fund industry to break RMB11.2tr (USD1.7tr) and room for growth remains.

• Investor demand remains highly lopsided but, based on historic trends, a reallocation of AUM is not only inevitable, it may be imminent.

• This industry AUM milestone comes the very week key government agencies prepare recommendations for changes in foreign ownership.

China’s market has doubled over the past three years and when it becomes Asia’s largest, serious questions will arise surrounding regional strategy. Such questions will center on the significant resources that have been poured into the second and third largest markets – forming the core of most global managers’ Asia strategies – while China has largely been ignored. This unfortunately will be the case for many that will need to pivot to an unfamiliar and often misunderstood market. All the while, Japan and Australia will be simply eking out modest growth. We project China’s industry to grow 15% annually for five years.

 
Many sceptics say a key driver of China’s AUM growth has been MMFs. While true (they account for 51% of AUM), it is a red herring. Although they keep capital in the industry, it’s our belief this AUM will be redeployed to other asset classes. What that will look like remains up in the air: passive represents just 4.9% of the market. Further quirks are that active management has remained popular among investors willing to pay for returns – a balanced fund raised RMB10bn (USD1.5bn) yesterday thanks to its track record – while only a small drop of China’s pension capital has entered the market.

 
Three dozen global managers have already entered the market – a number we expect to be 50 by 2018. It’s part of a broader trend of China increasingly opening up to global managers. Multiple government agencies, including PBoC, are known to be drafting new foreign ownership rules that could allow for majority control of joint venture financial firms. But what needs to be understood is that accessing China’s retail trillions is a multi-year process. Any global manager starting today could feasibly gain access by 2022 under their own brand name; three years after the likely first recipient.

Full version of our China Alert are for clients only, if you would like to know more information about subscription please contact:

Trey Archer – Tel: (+86 21) 6075-8163 Email: [email protected]