A report by the Boston-based firm examines the approach China is taking to rules governing its funds industry.

Although China’s mutual funds industry has become more tightly regulated, Beijing has also loosened certain rules to  boost cross-border links with more regions, a report by Cerulli Associates, the research and analytics firm, said in a new report. Competition will become stronger as more firms enter the market, it said.

Liberalising measures include increasing the number of trading days, expanding the scope of the Shanghai-Shenzhen-Hong Kong Stock Connect, launching ETF Connect, and expanding the Global Depository Receipts scheme to Switzerland and Germany, the report, entitled Asset Management in China 2022: Effective Strategies for Differentiation, said. 

While China is at odds with the US and other Western nations over trade and other issues, ironically the country has also sought to open its capital markets to outside capital. 

On 20 May this year, the China Banking and Insurance Regulatory Commission (CBIRC) released the Measures for Supervision and Administration of Managers of Publicly Raised Securities Investment Funds to enrich the mutual fund industry and pave the way for high-quality, sustainable development.

The measures relaxed the previous restriction of “one participation, one control,” and allowed for more applications of mutual fund licences, meaning that a group company can apply for the mutual fund licence through its asset management subsidiary, even if it already has a share in a fund management company (FMC) or has a controlling stake in another FMC. On the other hand, a parent company with a mutual fund-licensed subsidiary can still hold shares in an FMC through capital injection or equity acquisition. Besides FMCs, private security investment fund companies and the asset management subsidiaries of securities companies, insurance companies, and banks can apply for mutual fund licences.  

CBIRC’s measures follow the removal of the cap on foreign institutions’ stakes in securities, FMCs, and future companies since 2020, which have encouraged these institutions to accelerate their establishment of wholly foreign-owned financial entities in China or tried to take control of existing joint ventures (JVs) through equity acquisitions or capital increases during this two-year period. 

There are seven securities companies and five wealth management JVs among foreign-controlled companies, while wholly foreign-owned firms in China include two securities' companies, three mutual fund companies, two insurance companies, one insurance asset management company, and one futures' company. 

“While the industry’s development will benefit from the relaxed restrictions, Cerulli believes competition will become increasingly fierce as more market participants enter the fold,” Pan Yanjun, analyst with Cerulli, said. “Market share is likely to remain concentrated with top FMCs that have established reputations and track records. However, small- and mid-sized FMCs will find it difficult to compete with newer entrants, such as the asset management subsidiaries of top securities firms, which have rich resources in research, asset allocation, alternative strategies, and wealth management for high net worth clients. At the same time, more competition will improve the overall service quality of the industry.”