As Chinese mutual fund assets continue to boom – growing by 81% last year to well over $1 trillion, according to new Cerulli Associates research – mainland authorities appear increasingly keen to ensure suitable controls are in place.

A Hong Kong-based industry executive said watchdogs in China were starting to show concern about the regulation of mutual funds.

The China Securities Regulatory Commission and the Asset Management Association of China have in the past taken the stance that they wanted the domestic funds industry to grow unfettered, he told AsianInvestor

Now, however, with 15,000 loosely regulated funds in the country, the authorities are looking to neighbouring markets for guidance on how to avoid a major collapse that would seriously harm investors’ confidence in the market, he noted. 

Private fund managers have already been subject to a crackdown in the past few months, as regulators have sought to put a stop to illegal fundraising. This comes alongside a growing level of scrutiny of private capital in general after the Ezubao ponzi scandal emerged in January

Similar moves for the mainland mutual fund industry might well dampen what has been very rapid expansion of late.

Despite the turbulence in China’s stock markets in the second half of 2015, mutual fund AUM grew by 80.9% year-on-year to hit Rmb8.5 trillion ($1.3 trillion) as of end-2015, according to Cerulli (see figure 1). Indeed, the top 10 fastest growing fund houses by Asia-sourced AUM in the year to end-September 2015 were all Chinese, by AsianInvestor 's AI100 research

Mutual fund net new inflows amounted to Rmb3.1 trillion last year, driven by net inflows of Rmb2.3 trillion to money-market funds and Rmb700 billion to balanced funds, found Cerulli (see figure 2).

It was a year of two halves, with growth in the first six months driven by equity market bullishness, noted Miao Hui, Singapore-based senior analyst at the research house. “After that, investors’ appetite changed, and they were more concerned about capital protection. That is why balanced funds and guaranteed funds were so hot in the second half of the year.”

While growth in mutual fund AUM was impressive, the asset management space in China continues to be dominated by wealth management products (WMPs). WMP AUM crossed the Rmb20 trillion mark to hit Rmb23.5 trillion in 2015.

Despite the threat posed by online distribution, banks retain their leading position in China’s investment industry in terms of AUM, ahead of trusts, insurers and fund managers, said Hui.

However, banks will face challenges in 2016 because of a shortage of quality options to offer investors, said Hui. She pointed to the fact that many WMPs that had generated excess returns for banks would be maturing this year, and also that regulations were tightening around such products. As a result, noted Hui, bank WMP yield is expected to continue to decline this year.

Nonetheless, Cerulli expects banks’ investment outsourcing business to grow, especially via mandates from small and mid-sized banks in China, including rural financial institutions. Likewise, fund managers and securities firms may win more business from banks this year, said Hui.

This research forms the first part of a trilogy of reports on China’s asset and wealth management industry that Cerulli has scheduled for this year. 

Hui declined to make a forecast for AUM growth in 2016, but said “the growth rate for the past year is really dramatic, so I can’t see it continuing at that pace”.