China’s mutual funds industry saw AUM surge 29% in the final quarter to end 2012 at Rmb2.8 trillion ($449 billion), although this paints a deceptively rosy picture, finds Z-Ben Advisors.

The Shanghai-based consultancy notes that the rise was chiefly bolstered by firms’ annual tendency to raise year-end rankings by selling money-market funds (MMFs), rather than any incremental growth path.

Fund management companies (FMCs) saw more than Rmb200 billion in inflows into MMFs via organic and new product fundraising in the final three months of the year.

Beneath the figures you'll find major market problems: China Universal suffered heavy redemptions from its short-term bond fund, highlighting how despite appetite for the asset class it is not attached to a bank, while smaller players such as New China were unable to attract flows to their equity funds despite a Q4 rebound in which the CSI 300 shot up 10%.

The two leading players by market share in terms of fourth-quarter growth are both asset management arms of banks.

Top of the pile is Bank of China Investment Management, a joint venture between BOC and BlackRock, which saw its market share increase by 115 basis points from Q3, giving it an AUM of Rmb100.1 billion.

CCB Principal – established between China Construction Bank, Principal Financial and China Huadian Group – saw its share jump 105bp to Rmb94.5 billion in AUM.

Z-Ben says both were able to utilise their bank shareholders to drive MMF growth. 

Similarly, bank-backed manager Minsheng Royal recorded the highest fundraising for a new product with its own MMF offering, increasing its share by 48bp to Rmb21.1 billion in AUM, taking it to fifth on the market share list for Q4.

Its fundraising success was “undoubtedly due to its parent company’s distribution capability”, reflects Z-Ben.

The point is that with investment demand still sluggish in the fourth quarter, distribution channels played a disproportionately important role in driving market share.

“Distribution capabilities remain crucial to this product (MMF) strategy, which helps bank-backed fund-management companies consolidate and widen their lead,” finds Z-Ben.

Among market laggards, Southern FMC, GF and China Universal were bottom of the heap, having seen their market shares contract by 61-80bp.

Looking ahead, Z-Ben believes bank-backed managers will continue to hold sway. “In the absence of a continued [equity] market climb, fixed income products are likely to dominate FMC product plans and investor portfolios again, which will only reinforce the dominance of bank-backed FMCs over peers,” it notes.