China's funds market is a tenth of that of the US. While there is a lot of catching up to do, the recent change to regulations in the Asian country points to strong potential for licence applications, the rating agency says.

More investment fund managers will bid for onshore licences to run funds in China, a $2.2 trillion market that is still a tenth of the US equivalent as at the end of June, according to a report by Fitch, the global ratings agency. Looser Chinese rules governing foreign firms will open up the market – as recent moves demonstrate, it said.

Over the three years to the end of the first quarter of this year, China's mutual fund assets grew by almost 70 per cent, while global mutual fund assets in the US expanded by just 12 per cent, according to ICI Global data. China's mutual fund industry growth during the coronavirus pandemic is also notable, as assets grew by 11 per cent in the first quarter – and global mutual fund assets slipped by 13 per cent in the same period.

International investment managers' ability to access the Chinese domestic market has been limited. In terms of asset raising, these managers could enter only into joint ventures with domestic entities. However, the 51 per cent cap on foreign ownership of investment firms was removed in April 2020. 

Since April three international investment managers have applied for onshore licences, while a fourth was in the process of buying out its joint venture partner.

While no full licences have yet been granted, the application case of one investment manager, BlackRock, was accepted on 31 July, bringing BlackRock a step closer to being granted a full licence. Among China's 128 mutual fund houses, 44 were joint ventures as of the end of the first quarter of 2020, and these accounted for 54 per cent of total mutual fund assets.

“Fitch believes this development is highly significant for the presence of international investment managers in China, and that other international investment managers will probably file licence applications to enable them to have further access to the Chinese mutual fund market,” the organisation said.
 

Money market funds
Money market funds have been a major part of China's mutual fund growth. The largest fund type in China, MMFs account for around half of Chinese mutual fund assets. China was the second-largest MMF market in the world at the end of June, with assets under management of RMB7.6 trillion ($1.2 trillion), compared with assets of $4.4 trillion in the US. The US, however, has a much lower share of fund assets in MMFs, at around 20 per cent of the total.

MMFs tend to be less affected by market movements in periods of market stress than, for example, equity funds, and can even have inflows during these periods due to heightened risk aversion. As a result, the high allocation of funds to MMFs in China, compared with other markets, supported the high overall retention of fund assets in China in the first quarter of 2020.

The largest MMF in China, Yu'e Bao, has grown rapidly, driving growth of the overall sector. Yu'e Bao had assets under management of RMB1.2 trillion ($173 billion) at end-June 2020, making it one of the 10 largest MMFs worldwide - the other nine are US funds investing in government debt. Yu'e Bao's growth has been driven by its distribution channel - it functions almost like a cash utility, through the Alipay online payment platform.