The supposed overhaul of China's investment fund regulations, intended to be the most important revision of its kind in a decade, will most likely be a flop, say sources with close ties to the China Securities Regulatory Commission (CSRC). Two key culprits are to blame: one is the CSRC's lack of resources; the other, weak political appetite for an all-encompassing reform at the National People's Congress (NPC) level.
The original plan was for a complete overhaul that would see the CSRC's power massively expanded to include supervisory oversight of China's vast and murky underworld of private funds. But the eventual reform may be toned down to just a few tweaks addressing immediate problems besetting the fund industry.
Talk behind the scenes suggests the existing draft of new laws that has been submitted to the NPC will be drastically watered down to cover just a few key areas that had been exposed over the past two years of turmoil in China's financial industry. These areas include investment manager compensation, realignment of responsibilities and obligations between fund managers and product distributors, and better recognition of investors' rights and trading restrictions.
A CSRC source who requested anonymity says that in fund distribution, the new rules are likely to require distributors to take on a fiduciary role, making them conscious of and partially liable to investor losses. This particular detail, while important, is out of the CSRC's control, but will be spelled out by the NPC's financial committee. The source does not believe the move will make distributors discriminate against smaller or newer managers, nor limit the number of fund houses they will take onto their distribution platforms.
The private fund world will need to be reined in. The sector now likely holds the same or twice as many assets as the mutual fund sector. However, the CSRC has a full roster of issues to tackle, so it's unlikely the commission will have enough resources to start looking into private funds' activities, let alone start regulating them.
The source sees next year's NPC meeting as the earliest window for the draft rules to be passed. There are areas of the draft that remain controversial, and it is expected to be some time before a consensus will emerge. Subject to final NPC approval, implementation will probably be another few years away, as there is little urgency for the rules to pass.
Meanwhile, ongoing reform of fund rating rules and qualified domestic institutional investor (QDII) regulation will not be covered in the current draft. These areas appeared to have moved down the CSRC's list of priorities and will be covered in separate regulations.
The problem of talent retention in China's investment universe remains deeply disturbing. Over the past few years, top-performing managers have been deserting their posts at fund houses to join the rising league of so-called private funds. Such firms offer managers prospects of better pay, higher tiers of AUM sourced from high-net-worth clients and less stress, because private funds have no obligation to disclose portfolio performance or positions publicly.
Deserters have included chief investment officers of chart-topping houses, including Southern, Bank of Communications Schroders and JP Morgan. The latest rumour in the industry concerns Wang Yawei, whose record-defying fund, which has seen positive returns for a straight 11 years, is likely to beat Warren Buffett's best after this year.
Top fund bosses in the industry have been lobbying the CSRC since 2007 for permission to start handing top fund managers equity options. Particularly vocal advocates of such a move have included China Asset Management Corporation's Fan Yonghong, China Southern's Gao Lianyu and Bosera's Li Quan.
And the talent war is not exclusive to fund management. A director from the China Insurance Regulatory Commission quips that, in China, first-rate talent heads for private funds, second-rate talent stays in fund management, and third-rate players are in insurance asset management.
Meanwhile, the draft regulations include proposals that would tie fund managers' interests more strongly to their performance and to the interests of their investors.
The CSRC has already shown a willingness to open up new business that allows fund managers to compete with private funds on an equal footing. How this will eventually be implemented depends on the political will at the NPC level.