China’s share of the global mutual fund market has doubled from 3% to 6% since 2019 but is still only a fraction of the size of the US and European markets, while foreign participation remains low, according to Fitch Ratings.
The Chinese market has been driven by open-ended funds, which account for 88% of mutual fund assets and grew at a compound annual rate of 20% over the past five years.
As of August, the 10,262 mutual funds overseen by 159 fund houses in China had around 27.3 trillion RMB (US$3.79 trillion) of combined assets, Fitch says in a report on October 27.
That is only 13% of the $28.5 trillion US mutual fund assets and one-fifth of Europe’s $18.9 trillion.
Fitch also notes that China’s mutual fund landscape has become slightly less concentrated, with the top ten fund houses accounting for 40% market share in June 2022 from around 43% two years ago.
According to the report, the industry has become more diversified in recent years as Chinese investors shift from money market funds (MMFs) to exchange-traded funds, among other things.
Government figures show that MMFs’ share of mutual fund assets dropped from around two-thirds four years ago to 40% in January 2022.
“Given the volatility of [the Chinese] equity market and the challenge for active asset managers to outperform the benchmark index, we believe passive investments like ETFs will continue to be attractive for investors,” Li Huang, associate director, fund and asset manager ratings at Fitch, tells Asia Asset Management.
However, she notes that retail and institutional investors have increased allocations to MMFs and bond funds this year because they have become more risk averse. And in spite of the growing sustainable investing trend, she says Chinese investors still consider environmental, social and governance-themed funds less attractive due to lack of regulatory guidance.
Meanwhile, to illustrate low foreign participation, Fitch points out that only three foreign firms – BlackRock Inc., Neuberger Berman Group and Fidelity International – have set up wholly-owned mutual fund units. China allowed them to launch funds last year.
Beijing also scrapped foreign ownership limits in asset management joint ventures two years ago to boost foreign investment. But as Li notes, there’s been little progress due to the strict approval process.
J.P. Morgan Asset Management, the only foreign manager that has announced plans to buy out its Chinese partner, is still waiting to hear back from regulators.