Today (Thursday) a new clearing system for Chinese mutual funds will be introduced in time for a new product launch by Shenzhen-based Rongtong Fund Management, which will in turn be sold by five securities houses. The represents a first for China, where mutual funds could only previously be purchased from the fund company itself, or its bank distributor.
Amid last year's hype about introducing China's first open-ended mutual funds, one aspect went unmentioned: it's very difficult to buy one. Domestic business papers have run many stories about all the loops a customer has to jump through in order to buy funds.
The regulators, keen to support the new mutual funds industry, have quickly responded. The China Securities Depository & Clearing Corporation (SD&C) can now accept fund management company accounts, meaning brokers already using the system can sell registered funds to any institutional or retail investor with a brokerage account at either the Shanghai or Shenzhen stock exchanges.
Jason Ouyang, general manager for marketing and sales at Rongtong, says that by being the first fund management company to develop a settlement system with SD&C, it has created a protocol that will now be used by the entire industry. Rongtong is the first to use multiple brokers to sell the same fund.
So far distributing through securities firms has been limited, with only E-Fund, a Guangzhou-based fund management company, selling an open-ended fund through a single broker. But E-Fund is not using SD&C's systems so it remains limited to a bilateral relationship.
Brussels-based Euroclear has been working with SD&C since last year to upgrade its settlement systems, and SD&C is still in the process of integrating its two businesses at the bourses.
Rongtong's new fund, on the other hand, can be sold via any broker that has systems in place to qualify for a license from the regulators to sell a mutual fund settled via SD&C. Starting today, five brokers will be eligible to sell the Rongtong fund: China Securities, China Merchants Securities, Guosen Securities, Guotai-Junan Securities and United Securities.
It also means an investor with an account at one broker will be able to buy fund products from multiple fund management companies without having to open an account at each one.
"More investors in the stock market now have the opportunity to buy mutual funds," says Ouyang.
Fund managers in Shenzhen say the China Securities Regulatory Commission (CSRC) has stepped up its promotion of the industry. Now that it has seen the systems for open-ended funds are robust, it is approving a horde of new product launches. Moreover, observers say that it intends to approve around 10 new fund management company licenses over the next 12 months.
Some suggest a political motivation. As the 16th Party Congress looms, authorities want to boost stock markets and one method is simply making it easier to get investors' money into mutual funds, which in turn buy a lot of stocks.
But CSRC has long held a commitment to creating a vibrant asset management industry that will provide opportunities for pension savings. The move to allow SD&C to clear and settle mutual funds nearly completes the process of system-building. It also increases competition. The growing variety of open-ended mutual funds is already benefiting consumers by lowering average management fees from 2% on the first one launched last year by Huaan Fund Management in Shanghai to a fees as low as 1% on products being launched today - or even less for the biggest institutional investors.
The last piece the industry needs is a comprehensive series of benchmarks that encompass both exchanges, because today it is virtually impossible for investors to accurately compare performance. All mutual funds are essentially the same, although they are marketed as having different styles, because a lack of products such as options or futures makes it difficult for any company to innovate.
And then of course the industry remains hobbled by a lack of high-quality listed companies to invest in - but this is a broader issue.