Mutual fund assets in Asia ex-Japan grew 27%, its fastest pace in five years, to a record high of $652 billion in 2006, according to consultancy Cerulli Associates.

South Korea kept its status as the regionÆs largest mutual funds market in Asia ex-Japan, with $255 billion in assets, but China is clearly catching up.

ChinaÆs 80% growth in assets to $109 billion in 2006 was the most impressive in the region and elsewhere in the world. As of June this year, ChinaÆs mutual fund assets already more than doubled to $230 billion while South KoreaÆs has risen only 9% to $278 billion.

Ken Yap, Singapore-based director at Cerulli, says it is likely that China will surpass South Korea as the largest mutual fund market in Asia ex-Japan by the end of this year. He notes that China mutual fund assets have been growing at an average of 67% over the past five years, while South KoreaÆs has been growing at an average of 8% over the same period.

ChinaÆs mutual funds market has more room to grow. ChinaÆs qualified domestic institutional investors (QDII) program is attracting huge amounts of fresh capital from mainland investors, pension fund reforms are underway, and more investors are turning to mutual funds for long-term investments.

Cerulli attributes the overall surge in mutual fund assets in Asia ex-Japan to the confidence inspired by the strong performance of the regionÆs stock markets last year as well as regulatory reforms that led to an increase in mutual fund investors. Such reforms included ChinaÆs extension of its QDII program, the increase in IndiaÆs overseas investment limit, and South KoreaÆs tax exemption for foreign-invested onshore funds.

ôRegulators here are keen to deepen their financial markets by opening the doors, albeit tentatively, to foreign investing and foreign fund managers. This gives Asian investors greater incentive to consider professional asset management as an alternative to direct investments in the local stock market,ö says Shiv Taneja, CerulliÆs Singapore-based managing director.

Cerulli expects mutual fund assets in Asia ex-Japan to continue to grow at a brisk pace relative to other markets worldwide, but at a historically slower pace of 19% annually over the next five years compared with the 23% average in the previous five years. ThatÆs a conservative projection that takes into account one-off anomalies that may have affected recent data. Yap says.

ôAlthough the growth momentum in China seems to be continuing, we take that out when we do our quantitative analysis because we treat that as an anomaly,ö says Yap. ôIt may be hard for China to continue to see its mutual fund assets double, but then again, China has taken us by surprise in the past.ö

In other major markets in Asia, mutual fund assets in 2006 totaled $108 billion in Taiwan, $89 billion in India, $47 billion in Hong Kong, and $29 billion in Singapore.

While retail participation has increased overall in Asia, institutional investors continue to account for most mutual fund assets in South Korea and India. Banks remain the main distributors of mutual funds in Asia, with regional banks accounting for 17% of assets with bank distributors. In Hong Kong, the share of regional banks is higher at 44%.