China is turning to mutual funds amid debt crisis

China is turning to mutual funds amid debt crisis

TOKYO SHANGHAI - - While the China Evergrande Group debt crisis has roiled Chinese financial markets, China's version of Twitter has become alive with posts talking about mutual funds.

99.99% of people should buy mutual funds instead of picking stocks on their own, read one message on Weibo.

These are the reasons why I recommend mutual funds rather than single stocks, another user wrote.

These trends, which have been observed over the past year, illustrate how publicly traded mutual funds have ballooned to 24 trillion yuan $3.75 trillion in assets under management as of August, according to data from the Asset Management Association of China.

This represents a 20% growth from the end of last year to a scale nearly three times that of Japan's market. Retail investment has historically been concentrated in stocks, real estate and wealth management products.

This dynamic can be explained in part by a surge in people building their assets amid a graying society.

An increasing number of people, especially those in the younger generation, are entrusting the management of their retirement funds to professional investors, said a source from Mitsubishi UFJ Trust and Banking.

Competition is heating up within the mutual fund sector. Shanghai's SSE Composite Index has yet to break the record set in October 2007, indicating a strong sense of stagnation.

But authorities are gradually lifting foreign investment caps on mutual funds and other vehicles. BlackRock and other large asset management firms are actively entering the market.

Chinese fund managers are expanding as well, and there is an expanded roster of products to choose from. There are now 8,674 mutual funds. Some funds that focus on corporate growth potential have exhibited annual performance in double digits.

There is strong anticipation money in mutual funds will be shifted to other investment options. For example, wealth management products have been subject to regulatory crackdowns due to the murky nature of those portfolios.

The balance of wealth management products developed by banks has remained flat at the 20 trillion yuan range since 2016 according to the China Banking Wealth Management Registration and Custody Center. Meanwhile, mutual funds have grown to be worthy rivals of wealth management products from banks.

Mutual funds resemble wealth management products at first glance. The former was once in demand due to delivering yields that exceed interest rates from saving accounts.

But because wealth management products were poorly regulated, retail investors were scammed by offerings that allocated funds to companies that would not qualify for bank financing. A series of wealth management products went into default.

Meanwhile, mutual funds are required to be transparent. For one, the value of each fund must be disclosed and determined daily.

For Evergrande, the property developer that is inching toward default, angry investors had descended upon the company's headquarters in Shenzhen out of concern that they are being burned by Evergrande's wealth management products.

Evergrande said it issued 10% refund of wealth management products due at the end of September to customers. But that gesture has done little to repair the image of the investment option.

Also at the end of September, China's Ministry of Finance started soliciting public comments on a move to peg wealth management products and other asset management products to fair market values. If daily movement of values pose a downside risk to yields, then it's likely that more investors will shift to mutual funds with more transparency, said Liu Lin, the head of Aizawa Securities Shanghai office.

Declining interest in property investments - the source of Evergrande's problems - is a factor as well. The share of residential real estate contributed to the growth of household assets dropped more than 10 percentage points from spring to 62.5%, according to a survey conducted by China's Southwestern University of Finance and Economics in late August. By contrast, financial investment contributed 29.4%, a gain of more than 10 points.

The percentage of households planning to buy homes peaked at 11.6% at the end of 2020. It has since declined to 7.7%.

It is believed that non-financial assets make up 60% of total assets held by individuals, with most of the funds in real estate. But the severe debt problems wracking Evergrande and other property developers have fueled speculation that the once-booming real estate market has reached a turning point. This has prompted investors to look at financial assets.

To further China's economic development, mutual fund companies should continue to pursue high-quality development, Yi Huiman, chairman of the China Securities Regulatory Commission, said at the end of August. A proliferation of investment with an eye on the long term is expected to lead to stability in the Chinese market.

As of 2020, 48.2% of holdings of A-shares, or shares of companies based on mainland, trace back to institutional investors, such as mutual funds and foreign entities, according to numbers from China International Capital Corp. an investment bank. The numbers are based on market capitalizations of shares in circulation.

Meanwhile, the share of domestic investors for retail shares shrank to 51.8% from 90% in the early 2000 s. Expanding the depth of investor classes will open the doors to a virtuous cycle that will bring in more stakeholders.