China’s investment industry has expanded by two-and-half times since the end of 2014 to Rmb24.4 trillion ($3.7 trillion), driven by growth in mandates and fund management subsidiary business, according to new Fitch research. What's more, institutional investment overtook retail demand for mutual funds last year, noted the report.

The rating agency expects this broad expansion trend to persist on the back of swift accumulation of household assets, declining deposit rates, a steady growth in outsourcing by institutional investors and relatively low asset management penetration.

Both mandate and subsidiary business assets near-tripled between end-2014 and June 2016, the former to Rmb5.4 trillion from Rmb2.1 trillion, and the latter to Rmb11.1 trillion from Rmb3.7 trillion. Mutual fund assets recorded 78% growth in that time, to Rmb7.9 trillion from Rmb4.5 trillion. Fitch was citing data from the Asset Management Association of China (Amac).

Assets outsourced by banks to fund managers have largely contributed to the growth in mandates in China, noted the report. Bank wealth management products (WMPs) stood at Rmb23.5 trillion as of end-2015, up 56% year-on-year. Banks, lacking the capacity to handle this increase in asset scale, have turned to investment firms to manage these products via mandates.

Meanwhile, fund management subsidiary business is likely to shrink substantially as a result of tighter regulation, said Fitch. These subsidiaries function as a channel for shadow banking, the private financing sector that has seen rapid growth and subsequently come under increasing scrutiny in recent years. Such ‘channel business’, as it is known, has been the subject of a clampdown by both the banking and securities watchdogs this year.

Pension investment outsourcing

However, China’s National Social Security Fund (NSSF) and enterprise annuities (EAs) will continue contributing to the growth of mandate assets, as they steadily outsource more of their investments, said Huang Li, a Fitch analyst and co-author of the report (click on figure, below left).

NSSF held assets of Rmb1.9 trillion at end-2015, of which it managed 46% itself and outsourced the other 54% to 17 investment managers*, according to its annual report. External managers had managed about 50% of the institution’s assets as of end-2014.

The proportion of assets outsourced by NSSF has been rising in recent years because the fund’s AUM has been growing faster than the in-house team, Huang told AsianInvestor.

The total size of mandates handed out by NSSF and EA schemes in China has swelled 50% from Rmb800 billion at the end of June 2014 to Rmb1.2 trillion as of June 30 this year, said Fitch. And that amount is set to rise steadily, noted the report, a view supported by other evidence.

Institutions driving mutual fund growth

In addition to driving mandate growth, institutional assets in China also account for a fast-rising proportion of mutual funds. They accounted for Rmb4.2 trillion (52%) of mutual fund assets at end-June this year, having stood at Rmb936 billion (26%) at end-2014. The surge in mutual fund demand last year was mainly driven by institutional investors, noted the report.

Most of the flows went into money-market and balanced funds, added Fitch. As of June 2016, institutional assets accounted for 42% of balanced funds, 59% of money-market funds and 73% of bond funds, up from 15%, 21% and 40%, respectively, at end-2014. Equity funds are still dominated by retail investors (81%).

*The 17 managers are Bosera, Chang Sheng, China AMC, China Merchants, China Southern, China Universal, CICC, Dacheng, E Fund, GF, Guotai AMC, Harvest, HFT, ICBC Credit Suisse, NCSSF, Penghua and Yinhua.