Despite new Chinese rules that make it easier for asset managers to launch small mutual funds but harder for them to continue if they do not attract sufficient inflow, research firm Cerulli Associates does not expect a glut of product terminations or mergers.

But it is not clear that taking the route of switching fund strategy – rather than liquidating a below-threshold product – will be a sustainable solution, said the research house.

As part of August 8 moves to simplify fund launches, the country’s securities regulator lowered the IPO threshold for self-seeded mutual products to Rmb10 million ($1.6 million) from Rmb200 million. However, funds that don’t reach Rmb200 million within three years could face liquidation.

Relaxed registration and a lower threshold might be expected to spur more fund launches and a higher number of products being withdrawn or merged. But Cerulli argued that is unlikely in the near term as asset managers are reluctant to send the wrong signal to investors.

After rules were relaxed in early 2013, fund launches increased to 315 for the year from 235 in 2012. But this resulted in the proliferation of so-called 'zombie funds' – those with assets of less than Rmb50 million.

As of the end of June, 450 funds out of a total of 1,714 had fallen below the Rmb200 million IPO threshold, of which 118 were below Rmb50 million, said the report, citing Morningstar data.

Fund managers with a product that remains under the required Rmb50 million level for 60 consecutive days must propose a solution to the China Securities Regulatory Commission (CSRC). Liquidation, a change in strategy or a merger are the three options.

China Universal was the first manager to announce a plan to close such a product. The firm's 28-day Wealth Management Fund’s AUM stood at Rmb133.9 million as of June.

In the first seven months of this year, several funds have switched strategies, said Cerulli. “However, the jury is still out on whether a switch in fund strategy will lead to a sustainable increase in assets gathered."

In other regulatory amendments, the asset allocation levels for fund categories were changed. Equity products must now have 80% of their assets in stocks, up from 60%. Those failing to meet that requirement have one year to increase their exposure or change their strategy.

Also, standardised funds of funds were introduced, as reported.

As the CSRC moves to a more market-driven funds industry, the burden of protecting and educating investors will increasingly fall on distributors and managers, the report said.

“Distributors will have to play a bigger role in investor education and product gate keeping, which is not really happening now, and the CSRC will have to strengthen its grip on mutual fund sales practices,” Cerulli said.

The report also detailed fund flows in Asia. Global equity fund redemptions by Asia-Pacific investors continued for the third straight month in June, with $759.2 million being withdrawn that month alone. This took total redemptions for the first half to $1.5 billion.

One bright spot was healthcare-related funds, which posted the strongest gain in AUM in June, rising by 22.6% from May. That was driven by China, which accounted for 64.7% of AUM.