Caixin
May 05, 2017 07:34 PM
FINANCE

Regulators Complicate Waiting Game for Mutual Funds

(Beijing) — Dozens of firms, including securities brokers and insurers, have been waiting for months and even years for regulators to rule on their pending applications for new mutual funds, also known in China as publicly offered funds.

Now the waiting game has been complicated by a fresh set of regulations expected to impede the 9 trillion yuan ($1.3 trillion) mutual fund industry’s access to capital by restricting bank outsourcing of fund management responsibilities, said a mutual fund manager who declined to be named.

The regulations, implemented March 17 by the China Securities Regulatory Commission (CSRC), are aimed at closing mutual fund-related conduits that give companies in need of money indirect access to bank funds.

Regulators are particularly keen on risk control. To limit the potential impact of one investor’s moves, one new rule says a single institution may not control more than 50% of a mutual fund’s assets. Otherwise the fund must operate as a closed-end fund.

Later in the month, the China Banking Regulatory Commission (CBRC) issued additional regulations targeting banks that outsource fund management responsibilities. These rules are aimed at controlling risk, but a side effect is that they are expected to limit growth of the mutual fund industry.

The developments have cast a cloud over long-pending mutual fund applications filed with the CSRC.

So far this year, only one firm’s new mutual fund has gotten a green light. Nine firms were approved last year, including the first and so far only property developer, Henan province-based Anrong Real Estate Development Co. Ltd.

Five firms were approved in 2015, six in 2014, and 13 in 2013, according to the Asset Management Association of China (AMAC).

The 44 companies now awaiting a regulatory ruling include Anbang Life Insurance, the Changsha-based brokerage Xiangcai Securities, Kunming-based Pacific Securities Co. Ltd., and private equity firms Hony Capital and JD Capital.

Also in line are conglomerate Oceanwide Holdings Co. Ltd., financial data provider East Money Information Co. Ltd., brokerage LC Securities, and TTCO Trust Corp. Ltd.

But no one has been waiting longer than HNA Investment Group and Bohai International Trust Co. Ltd., whose joint application for a mutual fund was submitted in December 2014.

Business Diversity

Since China’s first mutual funds launched in 1998, the industry has grown to include 110 firms. As of December, according to financial data provider Wind, investors had funneled 9.16 trillion yuan into these funds, up 8.7% from a year earlier and double the 2014 total.

Contributing to the jump in funds under management was a CSRC decision in 2013 to open mutual fund asset management to a wider variety of entities. Firms were also attracted to the industry by the opportunity to pocket mutual fund management fees.

The decision cleared the way for some private equity firms to switch from their traditional business in favor of mutual funds. One firm making the transition was Pengyang Investment, which now specializes in mutual funds tied to bonds. Another is VStone Asset Management, whose largest shareholder, Chen Jiwu, made a name for himself as a skilled money manager during his tenure as chief investment officer at Fullgoal Fund Management.

“Firms are looking to use mutual funds to increase the amount of money they have under management and earn a stable income from management fees,” a private equity firm executive told Caixin.

Banks have been indirectly tied to the mutual fund business through contracts with asset management firms. Banks outsource funds to managers whose firms face fewer investment restrictions than banks — a practice that some say raises banking sector risks.

The recent decision to clamp down on this outsourcing practice via stricter fund management rules was based on regulatory interest in controlling sector risks.

The mutual fund industry’s management firms altogether earned 49.8 billion yuan in fees tied to these funds last year, according to data provider Wind Information, a 5% increase from total earnings in 2015.

Some firms rely heavily on mutual fund management fees, while for others, collecting fees is just a sideline. Among the 33 publicly listed companies that operate mutual funds, a Caixin survey found, management fees last year contributed to as little as 7% and as much as 83% of total revenues.

Fee revenues have been falling for some firms. Wang Rui, director of the Morningstar China Research Center, blamed competition and product diversification for declining management fees.

According to the AMAC, funds that provide specialized investment services to institutional investors grew to 16.68 trillion yuan in December, up 33.9% year-on-year.

And against the backdrop of this competitive landscape, some firms with mutual fund aspirations have decided to quit the application process rather than wait for regulatory permission.

According to incomplete statistics compiled by Caixin, at least 10 firms with pending applications later retracted those bids between 2015 and April this year.

The latest to throw in the towel was the private equity firm Chongyang Investment. The firm on April 12 said it was retracting an application it filed in December 2015.

Contact reporter Liu Xiao (liuxiao@caixin.com)

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