Beijing revamps mutual funds to protect investors and increase competition

Beijing’s revamp of the mutual fund industry, which requires funds to prioritise investors’ longterm interests and seeks greater participation from the financial sector, will intensify competition and help stabilise the market, analysts say.

Mutual funds must abandon the practice of seeking short-term returns, stop blindly pursuing scale and protect investors for the healthy development of the sector, the China Securities Regulatory Commission (CSRC) said in a statement on its website.

It encouraged banks, insurers and security firms to enhance participation in the segment by setting up funds based on the industry guidelines.

“The guidelines are aimed at tackling the disorderly expansion of capital [and improve competition],” said Wei Fengchun, chief economist at Shenzhen-based Truvalue Asset Management.

He noted the measures came against the background of inappropriate management of some mutual funds, which had led to the pursuit of short-term performance and preference for large scales. “[This] could cause market instability and possibly spread the risks [to the wider financial industry],” he said.

China’s mutual fund industry has ballooned to become the world’s fourth largest. The industry had 9,491 funds and was worth 26.34 trillion yuan (HK$31.53 trillion) at the end of February, according to data from the Asset Management Association of China.

But complaints from investors about huge personal losses are growing amid market volatility. Mutual funds lost 1.34 trillion yuan in the first quarter, as the benchmark Shanghai Composite Index fell 10.7 per cent. The decline has since widened to 18.7 per cent. Media reports said there was a growing possibility of a wave of redemptions as investors looked to curb their losses.

The CSRC said the funds should tone down hype surrounding portfolio managers as stars and curtail entertainment-oriented product marketing.

“The risk-control level, longterm investment performance for at least three years and actual profit of investors should be included while considering the performance” of portfolio managers and other core employees, the securities watchdog stressed.

The aim is to protect retail investors who increasingly rely on professional fund managers.

The CSRC said it would reduce restrictions on the number of licensed mutual funds that banks, insurers and security firms could own, and would guide underperforming funds to be deregistered or absorbed into another fund via mergers and acquisitions.

“The cooperative relationship between mutual funds and other financial institutions such as banks, insurers and securities companies will become more of a competitive one,” Wei said.