Fund management companies in China are facing difficult times ahead in terms of gaining new business and retaining existing ones. China will nevertheless continue to be among the fastest growing fund management markets in the world, with assets expected to hit Rmb4.1 trillion ($591.8 billion) by 2012, according to Boston-based financial services consulting firm Cerulli Associates.

ôThe sheer momentum of recent growth will propel the countryÆs asset management industry to the top of the regional league tables over the next few years," says Shiv Taneja, the firmÆs London-based managing director and head of international research.

CerulliÆs 2012 AUM projection for China suggests that the market will grow at a slower compounded annual growth rate of 4.1% over the next five years, taking into account the recent sharp declines in mutual fund assets. That growth is still expected to exceed most markets worldwide.

Cerulli data shows that assets under management at fund houses in China fell to Rmb2.18 trillion ($318 billion) in June, down 34% from Rmb3.33 trillion ($485 billion) at end-2007. ThatÆs particularly painful since the market came off a four-year ôred-hot growth phaseö where Chinese mutual fund assets grew by 114.8% between 2003 and 2007.

The drop in AUM at fund houses in China in the first six months of 2008 is higher than the total decline for the region. Mutual fund assets under management in Asia ex-Japan fell by 12% to $991 billion in the first half of 2008 from $1.126 trillion at end-2007, according to Cerulli. The bulk of the AUM shrinkage in Asia was also due mainly to market performance rather than mutual fund redemptions.

In a separate report, Shanghai-based consultancy Z-Ben Advisors says assets managed by Chinese fund houses are expected to drop by 16% to Rmb1.4 trillion ($204 billion) by the end of 2009, which will put enormous pressure on the profitability on many players.

The Chinese asset management market is still largely domestic in nature, and will likely remain so for the next few years. There continues to be strong indications that much of the retail appetite for mutual funds will continue to be channelled via onshore funds, despite the growing interest for the qualified domestic institutional investor (QDII) scheme.

In 2004, Cerulli became one of the first international research firms to conduct proprietary surveys with the largest Chinese asset managers and has continued to expand its coverage to include local players, as well as foreign joint ventures over the years.