Rules pending for new wave of China fund launches

China’s securities regulator CSRC is being tipped to release details in months on how firms managing sunshine funds – the prototype of hedge funds in China – will be able to roll out mutual funds onshore.

Beijing StarRock Investment Management, one of the nation’s largest such firms with Rmb4 billion ($653.2 million) in AUM, says it plans to set up a mutual funds division once new regulations are in place. It is among the firms anticipating that rules will be unveiled before the end of this year.

Amendments to the Securities Investment Funds Law, which included a provision for non mutual fund firms and other securities companies to launch mutual funds, became effective this June.

To date, only Shanghai-based Orient Securities has won approval to carry out mutual fund business, although many expect other sunshine-fund houses and securities firms to follow to tap the mainland’s retail market, worth an estimated Rmb2.8 trillion ($457.4 billion).

StarRock has already taken initial steps to set up a mutual fund division. This May, it identified two internal portfolio managers and one business development executive to work in the planned unit.

However, until the China Securities Regulatory Commission (CSRC) releases more details, this is as far as StarRock can go, says the firm’s chief executive, Yang Ling.

A number of questions remain, such as how sunshine-fund firms can outsource back-office functions. There is uncertainty, too, about how the CSRC will oversee these privately run firms as they launch mutual funds.

Yang warns asset managers seeking to tap the mainland’s retail market to be mindful of high set-up costs. Certainly, sunshine-fund firms tend to be smaller in AUM.

Setting up a back office, which involves valuation calculations and implementing risk controls, is expensive, adds Yang. “We are now exploring how to outsource it to a third party," says Yang. 

“What will the back-office cost look like? Will regulations require us to set up a unit to oversee the back-office operation? We have to wait and see.”

The National Development Reform Commission (NDRC) previously oversaw regulation for private equity and venture capital firms, while the CSRC regulated sunshine fund firms. However, in July these entities now fall under CSRC jurisdiction, although the NDRC will still have some input.

The shift this summer is the chief reason the CSRC has been delayed in drafting details for sunshine-fund firms to manage mutual funds, sources say. (The consultation period ended in March.)

Ultimately, falling under the CSRC should help such firms to secure qualified foreign institutional investor (QFII) capital. QFIIs previously avoided sunshine funds as they were unregulated. 

Yang says QFII holders are approaching StarRock to manage some equity mandates, although she declines to name them.