Unprecedented turmoil hits China’s mutual fund market

by Shura Guseva

The Chinese mutual fund industry is undergoing a significant upheaval, evidenced by the highest number of fund closures in the past five years. This trend, mirroring the downturn in the nation’s stock market, signals a severe decline in investor confidence. Data compiled by Bloomberg since 2014 reveals that around 240 local mutual funds were liquidated last year, a peak not seen since 2018’s regulatory reforms in asset management. Notably, 80% of these liquidated funds were heavily invested in stocks, marking a record in this domain.

Unprecedented turmoil hits China's mutual fund market

The concerning trend of mutual fund closures in China has persisted into the current year, with 14 more funds already liquidated and an additional 24 on the brink, as per Bloomberg’s analysis of official data. This downturn coincides with a significant drop in new mutual fund subscriptions, reaching a decade-low. The increasing rate of fund liquidations exacerbates the decline of the world’s second-largest stock market, creating a negative feedback loop as retail investors shift their preference from mutual funds to the perceived safety of cash holdings.

The Chinese mutual fund industry is facing unprecedented challenges due to the ongoing stock market crisis. Li Yiming, a senior analyst at Morningstar Inc., highlights that poor performance is a key factor driving the shrinkage and liquidation of mutual funds. The situation is worsened by the fact that China now holds the unenviable title of the world’s worst-performing major market this year. The CSI 300 Index, a critical benchmark, continues its downward trajectory, marked by its ninth decline in ten weeks despite state intervention in the market.

China’s securities regulations play a significant role in the ongoing mutual fund crisis. Funds must meet specific investor and capital requirements to launch, and a sustained drop in asset value triggers mandatory regulatory notification and potential liquidation. Many funds opt for liquidation over other complex options like merging, resulting in forced portfolio sell-offs and losses for investors, particularly those who invested in the long-term. The CCB Principal Quantitative Event-driven Equity Fund serves as a stark example, having lost over 90% of its value since its 2017 inception.

The appeal of actively managed mutual funds in China is rapidly diminishing. A China Securities Index Co. measure indicates a 7.7% decline in stock-focused mutual funds this year. Investors are also losing interest in exchange-traded funds (ETFs), which are now facing an oversupply issue. The ICBC Credit Suisse CSI Consumer Top ETF exemplifies the struggle, nearing the threshold for termination due to persistently low net asset values. Nicholas Yeo of abrdn underscores the prevailing market sentiment, noting significant redemptions and investor reluctance to engage in the market due to short-term selling pressures.

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