Recent launches of equity mutual funds in China have fared well. Now the market is abuzz with rumours that Guangfa Fund Management, a Guangdong-based fund management company established in 2003, is on track to raise Rmb12 billion ($1.5 billion) in a new fund launch that began last week.

This figure could not be confirmed, as the one-month marketing period only began on Monday, May 7, and Guangfa officials could not be reached by press time.

What is certain, however, is that equity funds in China are hot once more. Peter Alexander of Shanghai-based consultancy Z-Ben Advisors estimates that the Guangfa fund IPO will help drive total fund assets raised year to date over Rmb100 billion, the approximate amount raised in the entire year of 2005. And while most of the assets raised last year were in low-fee money-market funds, the action this year is all about equities.

The Guangfa IPO comes on top of a number of recent successful launches. UBS SDIC Funds Management Company, a joint venture between UBS Global Asset Management and the State Development Investment Corporation, closed its inaugural fund launch in mid-April with Rmb2.7 billion. At the time, this was the largest fund raising in active equities in China in 2006.

China International Fund Management, a JV between JPMorgan Asset Management and Shanghai International Trust & Investment, then raised Rmb6.4 billion for a new balanced fund in the first week of May.

Several other fund houses are also now marketing fund launches, including offerings from ABN AMRO Teda, Fortis Haitong and Franklin Templeton Sealand. So far no information was available about the asset sizes they are gathering.

Guangfa has two advantages. First, it has enjoyed good performance. Second, its primary distributor is ICBC, the largest commercial bank in China. The A-share market rose 11% in April and is likely to repeat that performance in May, allowing Guangfa and others to capitalise on investorsÆ greed.

Asset-gathering is one thing; asset retention is another. The big question for fund houses raking in money is whether this is going to be a repeat of what happened two years ago.

ChinaÆs funds industry experienced the first blockbuster launches in March, 2004, when Fortis Haitong Fund Management raised over Rmb12 billion in its Growth & Income Fund, and Citic Fund Management raised over Rmb11 billion in its inaugural launch, the Classic Allocation Fund. A number of other players enjoyed successful, if not quite blockbuster, deals as well.

It is typical for Chinese funds to suffer redemptions, and this also happened to Fortis Haitong and to Citic. The spring of 2004 had seen a temporary reversal of a long-term decline in the A-share market, and eager punters piled into equity funds, only to quickly lose money. Clients dribbled away, and by the end of 2005, the Fortis Haitong Growth & Income Fund was down to Rmb8 billion and the Citic Classic was reduced to Rmb7 billion û not very good, although in line with the industryÆs average pace of redemptions.

But disaster has struck these funds as the A-share market has bounced back this year. In the first quarter of 2006, the Growth & Income Fund has shrunk to Rmb5.6 billion, a single-quarter shrinkage of 38%, while the Classic has fallen to under Rmb4 billion, losing 45% of its assets. Punters were obviously waiting for the market to return to March 2004 levels û and then they bolted, in some cases for some of the new equity funds now being launched.

So this is a cautionary tale for new blockbusters: the bigger you are, the harder you may fall. ôThe similarities to 2004 are frightening,ö says Z-BenÆs Alexander.

But Guangfa and the other firms now raising sizeable assets may enjoy a happier ending. A number of factors suggest that the A-share market hit bottom by the end of 2005 and is now on an upward trajectory û a very different environment than the false dawn in the spring of 2004. Investors may yet dump these funds if they feel like churning profits û which also happens regularly in China û but for now, the mutual fund blockbuster appears to be back.