Shanghai-based ChangAn FMC has become the fourth fund management company to receive an operating licence this year, indicating that the China Securities Regulatory Commission (CSRC) is speeding up its approval process. The country now boasts 67 FMCs, and counting.

However, consultancy Z-Ben Advisors is already questioning the firm's potential viability in an increasingly crowded industry where recent fundraising of new FMCs has been less than stellar.

ChangAn confirms it is now in the process of formally establishing its business registration, adding that key personnel have been hired, although it is unable to provide specific details.

In January and May this year, the company advertised on the Securities Association of China (SAC) website for fund managers, analysts, product managers, a marketing director and sales managers to cover east and south China, institutional clients and retail channels in first-tier cities.

ChangAn will have registered capital of Rmb100 million ($15.6 million). It has three shareholders: Xi'an International Trust (49%), Shanghai MetersBonwe Fashion and Accessories (33%) and China Southern Industries (18%).

Besides ChangAn, three new fund management firms have also had operating licences approved so far this year – Fuanda, Caitong and Fubon Founder. Already this outstrips the three approvals of last year, while in 2009 there were none and in 2008 only two.

Expectations are that there will be 95 fund management companies in China within three years, according to a survey of senior executives at 30 joint-venture FMCs carried out by PwC earlier this year. That would mean an aggregate addition of around nine per year.

Z-Ben notes that ChangAn's preparations took just two years and states its belief that the CSRC "is increasingly comfortable with its new-found role of monitoring and enforcing regulation rather than actively guiding industry dynamics -- a stance likely to be highlighted in the yet-to-be-published Revised Fund Investment Law”.

The consultancy is expecting at least one or two more approvals by year-end. But the market has become increasingly crowded on the back of the CSRC opening multi-application channels for funds in the second half of last year, including active equity, fixed income, passive, QDII and innovative products.

The first six months of 2011 witnessed a record number of new fund launches – 107, compared with 70 in the same period last year – as fund managers strived to make up for consistent redemptions. This year has seen a 16% rise in the number of mutual funds to 819.

At the same time, the industry’s overall AUM has shrunk to Rmb2.36 trillion as at June 30, from Rmb2.52 trillion at the end of last year.

Z-Ben notes that it has become difficult for new entrants to gain business traction, suggesting breakeven AUM is close to Rmb10 billion and takes roughly twice as long to achieve as in 2008.

ChangAn FMC's registered capital of Rmb100 million, without provisions for additional capital injections in the near future, will pose significant challenges to the firm's success, muses Francois Guilloux, Z-Ben's regional sales director.

He suspects the firm will find itself with depleted capital within the next two years, if not sooner. "At the risk of overusing a popular metaphor, ChangAn is coming into a gunfight with a very dull knife," Guilloux adds.

He suggests registered capital upwards of Rmb300 million would be a more realistic investment level for a greenfield FMC to even hope for revenue streams to catch up with rapidly rising operational costs.

"While a licence represents a great option value, the ability to capture the next market rally will require a strong performance track record, a robust product portfolio as well as a strong brand positioning. While China represents enormous opportunity for investment managers, both foreign and domestic, a long-term investment horizon is almost a necessity going forward," he concludes.