(Bloomberg) — The collapse in Chinese stocks has hit the country's asset management sector hard, with the number of mutual fund closures reaching a five-year high, another sign of declining investor confidence. It has become.
Most Read Articles on Bloomberg
About 240 local mutual funds were liquidated last year, according to data compiled by Bloomberg through 2014. This is the highest number since 2018, when stricter asset management rules sparked major changes in the industry. Of the funds that closed, four out of five were equity-focused funds, a record number.
The trend has continued into this year, with 14 more funds already liquidated and another 20 warning of impending closure, according to official Bloomberg data calculations.
China's mutual fund industry is facing the double whammy of a sharp rise in product closures and a plunge in new applications to a 10-year low as the country's stock market decline intensifies. The fund's liquidation has accelerated a downward spiral in the world's second-largest stock market, creating a vicious cycle as retail investors abandon their once-favorite products for the safety of their cash.
“The poor performance was a key factor in causing mutual fund downsizing and even liquidation,” said Li Yiming, senior analyst at Morningstar's China Fund Research Center. “When investors find it difficult to make money in the market, poorly performing products run the risk of becoming so-called mini-funds.”
A relentless decline in the new year has made China the world's worst-performing major market, as a deepening housing recession and persistent deflationary pressures weigh on the economic outlook.
The benchmark CSI 300 index rose 1.4% on Thursday after signs of heavy buying by a government fund known as the “national team.” Mainland China's stock index remains down 4.9% in 2024, following three consecutive years of record declines.
China's securities regulator requires at least 200 investors and a minimum of 200 million yuan ($27.8 million) in funding to launch mutual fund products. If the asset value of a product falls below 50 million yuan for 60 consecutive business days, the fund house must alert regulators and propose solutions, including contract termination.
Many funds prefer liquidation due to the complexities of other options, such as merging with another fund. Closing such a product means forcing portfolio holdings to be sold and the remaining assets to be returned to investors at a loss. This will be especially painful for retail investors who have been buying these products in the hope that bargain hunting will pay off in the long run.
As an example, CCB Principal Quantitative Event-Driven Equity Fund, an open-end fund managed by CCB Principal Asset Management Co., Ltd., has assets under management of 30 million yuan, or just over one-tenth of the total. It plummeted and was liquidated in August. According to public filings, it was worthless at the time of its 2017 launch.
Actively managed mutual funds, once the investment tool of choice among Chinese retail investors, are rapidly losing their appeal. According to China Securities Index Corporation, the stock-focused mutual fund index has declined 7.7% this year. Meanwhile, investors are also staying away. Morningstar's Lee spoke of his love for exchange-traded funds (ETFs), which attracted record subscriptions last year but are now in oversupply.
The ICBC Credit Suisse CSI Consumer Top ETF, launched in October, is among its peers struggling to survive. The fund warned investors earlier this month that its net asset value had fallen below 50 million yuan in 45 trading sessions. If this situation continues for an additional five business days, it will trigger termination of the product under the contract.
“The market also recognizes that there has been a lot of redemptions. Some funds were set up three years ago and now that lock-up has ended,” said Nicholas Yeo, head of China equities at abrdn. He said this at a press conference on Thursday. “Therefore, there are concerns about short-term selling pressure and that is why domestic investors are not looking to enter the market at the moment.”
–With assistance from Xinyi Shen and Charlotte Yang.
Most Read Articles on Bloomberg Businessweek
©2024 Bloomberg LP