China Sees Exodus of Fund Managers

Equity funds are feeling the hurt amid China's economic woes

China's stock market performance has disappointed in the first half of 2023, accompanied by an exodus of fund managers. (AFP photo / Mandy Cheng)

Amid China’s economic downturn, several new equity funds have failed to attract investors, and fund managers have been resigning in droves since the start of June. Analysts attribute the equity fund trend to the poor performance of Chinese A-shares on the stock market, which has made stock selection and profitability challenging for fund managers.

Contributing to the exodus is China’s newly implemented registration-based system for IPOs, which makes fraudulent listings more of a risk, prompting investors to prioritize safety.

On February 17, the China Securities Regulatory Commission (CSRC) officially announced the “full implementation” of a registration-based system for initial public offerings (IPOs) to mainland China’s stock exchanges, replacing the existing approval-based system for China’s IPO mechanism.

Under the old system, IPOs on the main boards—home to China’s blue-chip stocks—needed a nod from the China Securities Regulatory Commission (CSRC), and IPO prices were capped by Chinese regulators.

Under the new system, stock exchanges vet IPOs with a focus on information disclosure, while the CSRC only makes sure listings are in line with national industrial policy.

Concerns About Registration-based System

While many were positive about the change, there were concerns that the reform could lead to a growing number of low-quality listings, potentially burning investors.

In April, 10 companies became the first to list under the registration-based IPO system.

Two months later, on June 20, the fears of some pessimists were realized with the first compulsory delisting of stocks on Shanghai’s Star Market due to fraudulent IPOs.

The same day, to stimulate the ailing economy, the People’s Bank of China (PBOC) once again lowered the Loan Prime Rate (LPR) reducing both the 1 and 5-year rates by 10 basis points compared to the previous period. This marks the PBOC’s first LPR reduction in ten months and followed cuts to other interest rates the previous week.

The LPR sets the interest rate that banks charge their premium clients, and serves as a benchmark for loan interest rate pricing. The reduction aims to lower financing costs.

However, market observers believe that this measure falls short of effectively reviving China’s economy, as evidenced by the significant decline in China-related Exchange-Traded Funds (ETFs) on the same day.

‘Rock Bottom’

The impact of the economic slump on China’s fund market is becoming increasingly apparent. On June 19, finance media China Net Finance reported, “The market has hit rock bottom, and fund managers are leaving at an accelerated pace.” As of June 19, at least 20 fund managers had already resigned, affecting 18 fund companies and asset management institutions.

This year, six funds have failed to raise capital, while 109 funds have extended their fundraising periods. In one example, on June 17, WinFund Management Co., Ltd. announced that its WinFund Jiarui 12-month holding period mixed securities investment fund failed to meet the necessary capital requirements during the fundraising period that began on March 17. Consequently, the fund contract couldn’t take effect, resulting in failure.

Many funds that have failed to meet the capital requirements this year are equity-based funds.

Equity-based funds, commonly known as equity securities investment funds or equity-oriented securities investment funds, primarily invest in stocks or equity securities. In contrast, fixed-income funds include money market funds, bond funds, and similar instruments.

Risk Reluctance

On June 20, UK-based finance industry veteran Fang Qi told The Epoch Times: “Equity-based funds are being neglected in the market due to the poor performance of the A-share market. This makes it difficult for fund managers to select stocks and generate profits. Furthermore, with the implementation of the registration-based system for IPOs, the probability of false listings has increased. As a result, investors, particularly retail investors, prioritize safety.”

A-shares are stock shares of mainland China-based companies, trading on the two Chinese stock exchanges: the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

Fang continued, “This year, bond funds, fixed-income funds, and central bank ETFs have dominated the market. Loose monetary policies and declining interest rates have boosted bond markets, attracting significant attention.”

Fang commented that fixed-income products indicate “a reluctance to take risks and a priority for capital preservation.”

In addition, central bank exchange-traded funds (ETFs) have gained popularity due to the Chinese Communist Party’s (CCP’s) support of state-owned enterprises.

“Many investors are betting on state-owned enterprises,” Fang said. The disparity between state-owned and private enterprises is startling. “The money being injected into state-owned enterprises has resulted in approximately 20 percent profits for them this year, while private and non-state-owned enterprises have experienced profit declines of over 10 percent.”

China’s stock market performance in the first six months of 2023 has been lackluster. The Shanghai Stock Exchange Composite Index closed at 3,150.62 points on June 26, barely higher than the year’s starting point of 3,157.64 points.

Promoting Private Investment Funds

On June 16, Chinese Premier Li Qiang chaired an executive meeting of the State Council to promote the recovery of the Chinese economy.  The meeting approved draft regulations for the “Supervision and Administration of Private Investment Funds.” It also emphasized the need for specific policies to promote the development of venture capital investment funds.

Fang noted that the Chinese leader’s focus is on promoting private investment funds, which differ from publicly accessible mutual funds such as equity-based funds.

He said, “Private investment funds primarily consist of venture capital enterprises. Currently, the Chinese economy is weak, with private investment growing by only 0.4 percent from January to April. Government funds are generally reluctant to invest in venture capital enterprises due to the high risks involved. State-owned enterprise funds have profit requirements and cannot afford losses, while private enterprises are conserving their cash flow to weather the economic downturn. Therefore, the authorities are feeling the urgency.”

On June 15, the National Bureau of Statistics of China released data indicating that private fixed-asset investment from January to May declined by 0.1 percent compared to the same period last year. This marks a decrease from the 0.4 percent year-on-year increase recorded from January to April. The year-on-year growth rate of nationwide fixed-asset investment from January to May also declined from 4.7 percent in the January-April period to 4.0 percent.

Reuters contributed to this report.