China’s Regulator Urges Fund Managers to Launch Equity Funds
In response to pressure from Chinese authorities to help revive the country’s struggling stock market, fund managers have been launching an increasing number of equity funds, known as “sponsored funds.” These funds are often majority bankrolled with the managers’ own funds. The aim is to prop up the stock market, which has reached five-year lows.
China’s securities regulator has recently given informal guidance to some fund managers, instructing them to launch at least four equity funds before opening any new bond funds. This guidance is part of the authorities’ efforts to boost the stock market, although some analysts question whether or not it will succeed.
Mutual fund companies in China are torn between the regulator’s guidance and investors’ lack of interest in equities due to the struggling economy. Consequently, more and more fund companies are setting up sponsored funds. These funds can be initiated with just 10 million yuan ($1.39 million) of seed money, which must be kept in the fund for three years. This is a significantly lower threshold compared to the requirement for new funds to have at least 200 million yuan of assets and 200 investors before launch.
Hedge fund manager Zhang Kaihua points out that “fund performance is ugly and clients are suffering from losses, so money managers have to take money out of their own pockets.” As a result, the number of sponsored equity funds and balanced funds that invest in stocks and bonds has increased by nearly 40% to 122 in the last year.
However, despite the surge in these funds, China’s blue-chip index continues to decline, raising doubts about the effectiveness of the regulatory measures undertaken since mid-last year. Last year, a total of 148 equity and balanced funds were forced to liquidate due to their small size, marking the highest number in five years.
Fund managers are facing pressure to launch equity funds, but in the current environment, it is difficult to raise money. Many fund managers are investing with their own money first as they have no other choice. This situation contributes to a vicious cycle where the lack of fund-raising and the declining stock market feed into each other, negatively impacting long-term investor confidence.
Sponsored funds charge the usual management fees and will be closed after three years if they fail to reach the required 200 million yuan in assets. Prominent managers of sponsored funds include China Asset Management Co, E Fund Management Co, China Southern Asset Management Co, and Fullgoal Fund Management. Some fund managers, such as Wanjia Asset Management Co and Galaxy Asset Management, have already set up sponsored funds primarily utilizing their own money.
Another driving factor behind the surge in sponsored funds is the hope among money managers that disappointed investors will seek fresh opportunities, providing a new lease of life for their businesses. With existing funds performing poorly and experiencing heavy redemptions and liquidations, portfolio managers are looking to start afresh with new funds.
China’s securities regulator has slowed down the approval process for fixed income products, instead focusing on expediting the approval for equity funds. Once fund managers receive the green light to launch an equity fund, they want to take advantage of the opportunity. Additionally, launching equity funds is often a precondition to launching bond funds.
In conclusion, fund managers in China are under pressure from the regulator to launch equity funds to boost the struggling stock market. However, the effectiveness of this strategy is uncertain, as the declining market and lack of investor interest pose significant challenges. Fund managers are increasingly setting up sponsored funds, utilizing their own funds to meet the demand for equity products.
Analyst comment
Neutral news
As an analyst, I expect that the market will see a short-term boost as more equity funds are launched, but the long-term impact is uncertain. The declining market and lack of investor interest may continue to pose challenges, limiting the success of the regulator’s strategy.
