Given the challenges faced by China's onshore asset management industry, some might argue the last thing it needs is yet more fund houses plying their trade. Especially when the latest round of new and prospective entrants largely comprises bank-backed managers, which hold a significant advantage in the form of a ready-made distribution network.

The most recent arrival is Donghai Funds, which received approval from the securities regulator on February 19 and obtained its fund management qualification certificate on February 28. The 78th mainland fund manager, Donghai plans to run mutual funds and segregated accounts.

With Rmb150 million ($24.1 million) in registered capital, the Shanghai-based firm has three shareholders: Donghai Securities holds 45%, Shenzhen Peng Bo Group 30% and Suzhou Xiangcheng Jiangnan Chemical Fiber Group 25%.

Meanwhile, at the end of February, six other fund management companies (FMCs) were awaiting approval from the China Securities Regulatory Commission. Banks must get the green light from the banking regulator before they can apply for a fund management licence from the CSRC.

The latest batch includes urban commercial banks, with both Bank of Beijing and Industrial Bank having received approval from the China Banking Regulatory Commission (CBRC) this week and now in the process of applying for CSRC licences.

Others reported to be seeking approval from the CBRC to apply to the CSRC are Bank of Nanjing, Bank of Ningbo and Bank of Shanghai.

Competition is growing in China's mutual funds industry as the regulator seeks to open the market. Following securities brokers, private funds, insurance companies, state-backed banks and joint-equity banks, now urban commercial banks are the latest to be allowed in.

The CBRC approved the first batch of bank-backed FMCs in 2005: Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China.

The programme further expanded in 2007 to include five more banks. Agricultural Bank of China, Bank of China, China Merchants Bank, Minsheng Bank and Shanghai Pudong Development Bank have all set up fund management arms.

The establishment of bank-backed FMCs can improve the asset management abilities of the commercial banks that own them and provide customers with more investment choices, says the CSRC. The regulator also emphasises the importance of risk control, urging banks to build up their risk management systems.

The CBRC says it will give banks independence in choosing joint-venture partners.

The bank-backed newcomers have a definite advantage due to their existing distribution channels, especially those with strong connections with local clients, says a Beijing-based funds analyst.

This was clear from fourth-quarter figures. Bank of China Investment Management, a joint venture between BoC and BlackRock, saw its market share increase from the third quarter by 115 basis points to Rmb100.1 billion in AUM. And CCB Principal – set up by China Construction Bank, Principal Financial and China Huadian Group – saw its share rise by 105bp to Rmb94.5 billion in AUM.

Both were able to use their bank shareholders to drive mutual fund growth, says Shanghai-based consultancy Z-Ben Advisors.

Banks are the main distributors for investment products, accounting for more than 50% of total sales. For an FMC to just break-even, it should be running at least Rmb10 billion.