In Depth: China’s Mutual Fund Minnows Struggle to Survive

China’s $4.5 trillion mutual fund industry is undergoing sweeping regulatory reforms designed to lower costs for everyday investors, a move that is squeezing profit margins, especially for small and midsize firms, and sparking industry-wide upheaval[para. 1]. The overhaul, first rolled out in 2023 and fully taking effect in 2024, dismantled longstanding “soft dollar” arrangements where asset managers paid high commissions to brokerages, which in turn subsidized fund managers with bundled services like research, data access, and market-making[para. 2][para. 3]. This cushy system led to surging brokerage commissions from mutual funds, from 13% to 18% of total brokerage income between 2017 and 2021, reaching 25.3 billion yuan ($3.5 billion) by 2021[para. 4]. Now, under the Management Provisions on Securities Trading Fees (enforced July 1, 2024), commissions are tightly capped and can no longer be used to pay for research or liquidity provision, echoing Europe’s MiFID II reforms[para. 5][para. 6].

The effects have been dramatic: brokerage commissions from mutual funds plunged 35% from 16.84 billion yuan in 2023 to 10.99 billion in 2024[para. 7]. Fund managers must now pay directly for essentials such as data terminals and index licensing fees, significantly shrinking profit margins for smaller players. For instance, E Fund Management and China Southern Asset Management saw profits rise by over 15%, but Bank of Communications Schroder Fund Management’s profit fell 26.8%, and a Cinda Securities-controlled fund manager’s profit dropped nearly 42%[para. 8].

A particularly acute challenge is the impact on the ETF market, which has grown from 1.1 trillion yuan in 2020 to 4.3 trillion yuan by mid-2025. Under the old regime, market-making services were subsidized, but now fund managers must pay brokerages an annual interest of roughly 5.5% for market-making capital. Providing as little as 1 billion yuan in market-making capital now costs 55 million yuan annually, leading large ETF houses to potentially spend hundreds of millions of yuan yearly just on market-making[para. 11][para. 12][para. 13].

Index licensing costs have also spiked under new rules mandating fund managers pay, not fund assets—a move estimated to cost China Asset Management, the top ETF house, about 150 million yuan per year, and smaller counterparts nearly 16 million yuan each[para. 17]. For small managers, with fewer than 50 employees, profitability requires at least 10 billion yuan in assets under management, half of it in active equity products with higher fees[para. 20]. Currently, 59 out of 199 licensed fund houses fell below this line in 2024, facing a vicious cycle of shrinking assets and escalating fixed costs. Annual IT and infrastructure costs alone can swipe 5–20 million yuan, with customization adding further expense[para. 22][para. 23][para. 24].

Foreign firms are also struggling. Of the nine wholly foreign-owned mutual fund companies in China, only J.P. Morgan Asset Management and Manulife Investment have serious scale; BlackRock, the largest, still has only 7.7 billion yuan under management[para. 27]. Foreign players find it hard to break into retail bank distribution without a significant track record, and high entry barriers exclude them from lucrative overseas investment quotas and China’s massive pension market[para. 29]. Poor performance has hampered them further, with BlackRock’s main China fund losing over 38% of its value since 2021[para. 30][para. 31].

Ultimately, as passive investing grows at the expense of active funds (AUM for passives nearly tripling while active shrank by nearly 40%), survival now depends on operational efficiency, ultra-low fees, and scale—an increasingly tough proposition, especially for smaller and foreign players[para. 33][para. 34].