Sunday, December 3, 2023

Bubble fears grow as Chinese fund launch attracts huge inflows

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China’s mutual fund industry assets jumped 48 percent to a record $ 3.1 billion (Rs 20 billion) in 2020, but huge demand for new funds is fueling fears that Influxes of volatile investors don’t cause a stock market bubble.

China is expected to become the world’s second-largest asset management market after the United States this decade, offering a huge growth opportunity for investment managers.

UBS predicts that the continent’s mutual fund assets could reach $ 16 billion by 2030. Assets held in US mutual funds currently stand at around $ 23 billion.

New fund launches in the U.S. and Europe often struggle to attract investors who refuse to make commitments until a three-year performance record is available and a $ 100 million pot of ‘established assets. However, the reverse is true in China where asset managers are struggling to meet demand for new products.

New mutual funds launched in China last year attracted net inflows of $ 389 billion, up 90% on allocations to debut in 2019, according to Z-Ben, a consultancy based in Shanghai which also recorded the rise in the country’s mutual fund industry from $ 2.1. tn to $ 3.1 billion.

Demand has been particularly strong for balanced funds that invest in both stocks and bonds where allocations to new launches reached $ 250 billion, up from just $ 36 billion in 2019. Newly active equity funds launched grossed $ 36 billion, compared to $ 5.7 billion, according to Z-Ben.

About 80 percent of the total net inflows (excluding money market funds) gathered by Chinese asset managers last year were captured by new launches. But keeping cash can also be problematic.

“The hyperactive fund churn rate is a hallmark of the onshore investment industry,” said Peter Alexander, founder of Z-Ben.

Trading on mobile phones helps generate frantic entries and withdrawals, as investors often quickly take profits on early gains from a new launch and jump into another product.

Z-Ben estimates that between 20% and 30% of the cash raised by the new active equity funds is repaid within six months.

Investor appetite for new funds continued through the first weeks of 2021, with managers seeing massive oversubscriptions ahead of launch day.

E Fund Management shattered the fundraising record for a Chinese manager after receiving orders worth $ 36 billion in a single day for its new product – the E Fund Competitive Advantage Enterprise Balanced fund. It was capped at $ 2.3 billion.

Mr Alexander said the level of interest was “not an isolated event” as 15 other funds also sold in a single day in January.

The new active equity funds launched this month received subscriptions worth $ 57.8 billion as of Jan. 19, but the actual capital raised was limited to $ 27.8 billion by managers. Indeed, more and more managers are imposing tighter limits on subscriptions and rejecting large orders in an attempt to control retail investor fever.

It is not known whether such measures will work, as regulatory changes are going in the opposite direction.

Kelvin Chu, analyst at UBS in Shanghai, said stricter rules for wealth management products sold by banks and wealth managers have encouraged more retail investors to invest their savings in mutual funds .

“We expect more household financial assets to turn into long-term mutual funds,” Mr. Chu said.

CrossBorder Capital, a London-based consulting firm, estimates that China alone provided nearly a third of the $ 22.7 billion surge in global liquidity in 2020, as central banks opened monetary taps to prevent the coronavirus pandemic from destabilizing financial markets.

“High liquidity ratios are associated with future increases in stock prices,” said Michael Howell, founder of CrossBorder. He recommends China A shares to his clients as a “buy”.

A senior adviser to the Chinese central bank warned this week that the risk of asset bubbles would increase if monetary policy is not tightened. The comments from Ma Jun, a member of the People’s Bank of China monetary policy committee who also worked at the World Bank and the IMF, follow a 34% rise in the Shanghai Composite Stock Index from its low of 2020 end of March.

The technology-focused ChiNext Index rose 49% over the same period, attracting retail investors.

“The PBoC is clearly concerned about bubbles, as Ma Jun talks about them openly. The rally in Chinese stocks has been alarming and [the equity market] seems exposed if the vaccine deployment does not go smoothly, ”said Freya Beamish, chief economist for Asia at Pantheon Macroeconomics, the consultancy firm.


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