China fund assets to exceed $1 trillion

China’s 2.3 trillion yuan ($337 billion) fund industry may triple in size in the next five years as new products attract money away from banks in the world’s fastest-growing major economy.

China’s 18-year-old fund industry is stepping up innovations under Beijing’s financial reforms, preparing for products such as global exchange-traded funds (ETFs), overseas index-tracking products and real estate investment trusts (REITs).

“(An) irreversible trend of bank disintermediation, especially on the retail side, and the increasing attractiveness of financial products will be the main driver of growth,” said Zhang Haochuan, analyst at fund consultancy Z-Ben Advisors, which sees China’s fund assets under management topping 6.9 trillion yuan by 2014.

“A tripling of assets in five years is not an exaggerated target,” said Mandy Wang, CEO of China International Fund Management Co, JPMorgan’s China fund venture. “New business opportunities abound.”

A bigger, more mature fund industry can bring much needed stability to China’s volatile stock markets, and help fund growth of Chinese companies that traditionally rely on bank lending.

Product innovation is also crucial to China’s ambition to foster globally competitive bourses and make Shanghai an international financial hub by 2020.

Aiming to be one of the world’s top exchanges, the Shanghai Stock Exchange is seeking cooperation with some of China’s leading fund houses to develop a pilot program for global ETFs.

Global ETFs, which would be listed in Shanghai and typically track overseas stock indexes, are being designed to meet demands from China’s increasingly sophisticated investors.

Z-Ben Advisors forecast China’s first global ETF may debut in late 2011 or early 2012, with 10 such funds expected to be launched by Sino-foreign fund ventures in the next five years.

China ventures of Deutsche Bank, Blackrock, Invesco Ltd and other foreign institutions with ETF expertise are likely to be among the first fund houses allowed to launch global ETFs in China, the consultancy said.

Plans for global ETFs, which will be launched under China’s Qualified Domestic Institutional Investor (QDII) scheme, come as a recovery in the global economy and financial markets help revive Chinese demand for overseas securities.

Approval of new QDII products, which allow Chinese money to invest overseas, was suspended during the global crisis, but many fund managers expect approval to resume as soon as this year, creating significant new opportunities, PricewaterhouseCoopers said in its 2009 China fund report.

China’s foreign exchange and securities regulators met domestic fund houses to discuss QDII issues, sources told Reuters in May, fuelling optimism that QDII may return soon.

“The trend of further deregulation is unchanged,” said China International’s Wang. “Demand for QDII products is recovering.”

China International, which has launched the China International Asia Pacific Advantage Fund under QDII, is preparing for new funds that would give Chinese investors access to U.S. and European stocks, Wang said.

Guotai Asset Management aims to launch funds that track the Nasdaq 100 Index, while China Southern Fund Management is preparing for QDII products that track the Standard & Poor’s 500 stock index.

REITs

In addition to QDII, REITS are an important opportunity for China’s fund managers in the coming years as regulators introduce new products, according to the PWC report.

China plans to allow fund houses and brokers to launch REITs in the form of closed-end funds in Shanghai, sources have said, citing draft rules by the China Securities Regulatory Commission.

“REITs are liquidity investment instruments that would enable individuals to invest in properties even with a few thousand yuan,” said Alex Wang, real estate layer at Paul, Hastings, Janofsky & Walker LLP.

However, a deep and liquid REIT market is unlikely in China in the short term, some analysts said, citing a lack of qualified properties, uncertain investor demand and the absence of a comprehensive securitization law.

For many mutual fund houses, the most realistic opportunity would be via so-called segregated account business, which serves institutions and wealthy individuals through hedge fund-type accounts.

China in late 2007 allowed mutual fund managers to offer such a service, enabling them to compete with the country’s fast-growing private fund sector. There are currently five dozen mutual fund companies in China, including 33 Sino-foreign ventures.

China’s private funds, or hedge funds, are independent investment advisories that manage clients’ money privately, targeting absolute, rather than relative returns.

The private fund industry boomed in the mid-2007 bull market as it lured a handful of star mutual fund managers with higher pay and more flexible investment strategies.

“Buying mutual funds is like using public transport, while segregated account clients can enjoy cab services,” said Wang of China International, which last month obtained a license for the business.

Source: Reuters