TOKYO / SHANGHAI – As the China Evergrande group debt crisis rocked Chinese financial markets, the Chinese version of Twitter came alive with posts talking about mutual funds.

“99.99% of people should buy mutual funds instead of picking stocks themselves,” a post on Weibo read.

“These are the reasons I recommend mutual funds over individual stocks,” wrote another user.

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

This represents a growth of 20% compared to the end of last year on a scale almost three times that of the Japanese market. Investing in retail has historically focused on stocks, real estate and wealth management products.

This dynamic can be explained in part by an increase in the number of people building their assets in an aging society.

“More and more people, especially younger people, are outsourcing the management of their retirement funds to professional investors,” said a source from Mitsubishi UFJ Trust and Banking.

Competition is intensifying in the mutual fund industry. The Shanghai 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 ceilings on mutual funds and other vehicles. BlackRock and other large asset management companies are actively entering the market.

Chinese fund managers are also growing, and there is an expanded list of products to choose from. Today there are 8,674 mutual funds. Some funds focused on the growth potential of companies posted double-digit annual returns.

There is a strong anticipation that the money in other investment options will be transferred to mutual funds. For example, wealth management products have come under regulatory crackdowns due to the murky nature of these portfolios.

The balance of wealth management products developed by banks has remained stable at 20 trillion yuan since 2016, according to the China Banking Wealth Management Registration and Custody Center. During this time, mutual funds have become worthy rivals for bank wealth management products.

At first glance, mutual funds look like wealth management products. The former was once in high demand because of its higher yields than savings account interest rates.

But because wealth management products were poorly regulated, retail investors were scammed by offers that allocated funds to companies that would not be eligible for bank financing. A series of wealth management products were lacking.

Meanwhile, mutual funds need to be more transparent. On the one hand, the value of each fund must be determined and disclosed on a daily basis.

For Evergrande, the property developer who is about to default, angry investors had flocked to the company’s headquarters in Shenzhen, fearing they would be burned by Evergrande’s wealth management products.

Evergrande said it issued its clients a 10% refund of wealth management products that were due at the end of September. But this move did little to fix the image of the investment option.

Also in late September, China’s Ministry of Finance began soliciting public comment on a decision to peg wealth management and other asset management products at fair market value. This measure would come into force from next year.

“If the daily movement of values ​​poses a risk of lower returns, it is likely that more investors will turn to more transparent mutual funds,” said Liu Lin, director of the Aizawa Securities office in Shanghai.

Declining interest in real estate investments – the source of Evergrande’s problems – is also a factor. The share that residential real estate contributed to household asset growth fell more than 10 percentage points from the spring to 62.5%, according to a survey by the Southwestern University of Finance and Economics of China late August. In contrast, financial investments contributed 29.4%, a gain of more than 10 points.

The percentage of households planning to buy a home peaked at 11.6% at the end of 2020. It has since fallen to 7.7%.

Non-financial assets are believed to account for 60% of total assets held by individuals, with most funds being in real estate. But the serious debt problems rocking Evergrande and other real estate developers have fueled speculation that the once booming real estate market has reached a turning point. This has prompted investors to take an interest in financial assets.

To promote China’s economic development, mutual fund companies “should continue to pursue high-quality development,” said Yi Huiman, chairman of the China Securities Regulatory Commission at the end of August. A proliferation of investments with a long-term vision should lead to the stability of the Chinese market.

In 2020, 48.2% of holdings of A shares, or shares of mainland-based companies, go to institutional investors, such as mutual funds and foreign entities, according to figures from China International Capital. Corp., an investment bank. Figures are based on the market capitalization of outstanding shares.

Meanwhile, the share of retail investors in domestic stocks has declined to 51.8% from 90% in the early 2000s. Broadening the depth of investor classes will open the doors to a virtuous circle which will attract more stakeholders.


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