In Depth: China’s Mutual Funds Face Fresh Overhaul With Focus on Cutting Fees

China has begun a comprehensive overhaul of its mutual fund industry as part of a broad effort to boost investor confidence, stabilize financial markets, promote long-term value investing, and reduce institutional fees. This move is orchestrated by the China Securities and Regulatory Commission (CSRC), which launched an action plan in May outlining major reforms: fund managers' compensation will now be tied to long-term fund performance, prioritizing investors’ returns rather than just asset size or rankings. The reform, starting with the largest mutual fund firms, will take approximately three years to implement[para. 1][para. 2].

This “Action Plan for Promoting the High-Quality Development of Public Funds” was created in response to a Politburo meeting in September, which urged reforms due to economic hurdles like weak domestic demand, a persistent property market downturn, and waning investor confidence. One of its core goals is to revitalize capital markets by attracting medium- and long-term capital and reforming the mutual fund sector[para. 3].

Historically, the public mutual fund industry in China has suffered from misaligned incentives: investors seek returns, distributors prioritize subscriptions and redemptions, and managers focus on growing assets under management (AUM). This misalignment has created disjointed industry development, with fund managers often chasing short-term performance and engaging in "style drift"—abandoning their original investment approach to benefit from market trends. Such behavior has damaged investor trust and often resulted in cycles of rapid expansion followed by sharp losses when market fads cool. The CSRC aims to disrupt this cycle and restore trust in the system[para. 4][para. 5][para. 6].

A key reform is the shift from fixed to floating management fees based on fund performance. Managers who outperform benchmarks over the long term can charge higher fees, while those who underperform must reduce them. Fund manager evaluations will now be more closely linked to medium- and long-term results, with continuous underperformance affecting compensation. To prevent style drift, new, more precise benchmarks for funds will be introduced, prohibiting the use of easy or irrelevant measures like deposit rates[para. 7][para. 8].

Fund companies must also adopt evaluation systems focused on investment returns, reducing emphasis on AUM rankings and revenue. Investment return metrics will include the fund’s performance compared to benchmarks and actual investor gains or losses over realistic holding periods of at least one year, discouraging emphasis on short-term performance[para. 9][para. 10][para. 11].

By the end of 2024, there were 75 public funds using floating fees, totaling 78.3 billion yuan ($10.9 billion) in AUM. Over the following year, China’s top 20 asset managers are expected to offer floating-fee products for at least 60% of their actively managed equity funds, potentially expanding industry-wide if successful. While fixed fees remain the global norm, floating fees are designed to align fund managers' interests with those of investors by making it harder to raise fees without outperformance and easier to lower them when underperforming. Only investors holding for over one year will be subject to floating fees, promoting long-term investment. However, some industry insiders fear floating fees could destabilize fund managers’ incomes or incentivize overly aggressive strategies[para. 15][para. 16][para. 17][para. 18][para. 19].

Additionally, all fund benchmarks will now be standardized by the Asset Management Association of China (AMAC). Managers underperforming their benchmarks by over 10 percentage points across three years will see remuneration reduced; outperformance will lead to reasonable increases. Cost-reduction measures, particularly in IT, are also planned, helping firms cut operating expenses[para. 23][para. 24][para. 25].

These reforms continue efforts from 2023 and 2024 to lower investor costs, including capping management fees at 1.2%, reducing trading commissions from 0.08% to 0.05%, and increasing transparency in fees paid to custodians—further fostering a fairer, more investor-centric industry[para. 27][para. 28].