Z-Ben: China's mutual fund industry to grow in 2013, helped by institutional tailwind

China’s mutual fund industry in the coming year should match or top the 30% growth in assets under management it enjoyed in 2012, with the help of a tailwind from rising equity valuations as institutional investors boost allocations to local shares, according to an analysis Wednesday by Shanghai-based consultant Z-Ben Advisors.

The industry closed the latest year with a combined AUM of 2.8 trillion renminbi ($445 billion), up from 2.15 trillion renminbi at the end 2011, and should be able to achieve a new record high of 3.68 trillion renminbi by the close of 2013, Z-Ben predicted.

According to Z-Ben’s analysis, the 30% rise during 2012 was powered by risk-averse retail investors pumping a big chunk of the year’s 644.7 billion renminbi of new allocations into money markets funds — lifting those funds’ share of overall AUM to 20% from 14% at the end of 2011.

But another factor buoying AUM, with potentially greater relevance for the coming year, was a 10% rally for China’s CSI 300 index, which tracks 300 companies listed in Shanghai and Shenzhen, during the fourth quarter, which helped lift that index from negative territory to end the year with a 7.55% gain, Z-Ben noted.

In a telephone interview, Francois Guilloux, director, regional sales with Z-Ben, said a number of trends currently under way in the Chinese market could end up making his firm’s prediction of a 31% gain in mutual fund AUM for the coming year a very conservative one.

Mr. Guilloux noted that Chinese regulators are lowering hurdles now for foreign institutional investors looking to invest in the country’s capital markets at the same time they’re ramping up pressure on local institutional investors, such as pension schemes and insurance companies, to diversify investment portfolios that remain well over 90% invested in safe but low-yielding instruments such as certificates of deposit.

The prospect of that pickup in institutional allocations to local equities should further support equity prices, even if the rapid pace of gains in recent weeks moderates somewhat. That continued momentum could prompt a considerable reallocation of retail assets away from the low-risk favorites of 2012, back to equities, Mr. Guilloux predicted.

Mr. Guilloux predicted that fund management companies that enjoyed sharp increases in AUM last year by launching money market funds could face a tricky pivot in that scenario.

Along with broader liberalization moves, Chinese regulators look set to lower the hurdles that companies, including insurance companies, have to clear to offer mutual funds, Mr. Guilloux noted. So while inflows and allocations to equity funds could surge, the competitive landscape likewise appears poised to become much more crowded, which will make product innovation and client service increasingly important keys to success for fund management firms here, he said.