China’s US$20 trillion asset management industry to embrace more diverse products amid revamp, think tank says

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China’s asset management industry is expected to further diversify its offerings to reduce volatility and risks during market downtime, amid the faster entry of foreign competitors and a government revamp of the US$20 trillion sector, a Beijing-based industry think tank said.

In a report published on Monday, China Wealth Management 50 Forum said the net asset value of 69 per cent of the more than 15,000 mutual funds in China dropped in April, showing the close link between risks and lack of diversification. The forum is led by current and former financial regulators, local officials, industry associations and industry participants.

“The asset management industry’s ability to satisfy residents’ need for diverse allocations is relatively weak. The connectiveness of the risks of the products is still relatively high, which leads to the fact that people find it hard to effectively diversify risks through different assets amid fierce market volatility,” said analysts Gong Fang and Yuan Yuze.

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China’s asset management industry surged in size by 11 per cent to 132 trillion yuan (US$20 trillion) in 2021, the report said. In 2020, McKinsey and Company forecast that this market would reach 196 trillion yuan by 2025. Expectations of rapid growth have spurred the realisation that the industry needed to adopt international standards urgently.

The homogenisation of products in the industry was severe, and it needs further development of new categories such as derivatives, the analysts said. Asset managers in mainland China also need to improve their ability to minimise big volatility in performance and match market players’ development with that of their international peers.

The offerings are expected to be more diverse, as more fund of funds and real estate investment trusts (REITs) are developed in the country, said the report, which also analysed the outlook and current development of the segment since China announced a guidance to revamp the industry and to curb financial risks in April 2018.

This year marks the start of the comprehensive implementation of regulations, after a buffer period finished at the end of last year. That also means that wealth management products will stop providing implicit guaranteed returns for investors.

In China, both mutual funds and trusts have experienced big fluctuations in recent years, with the former recorded a loss as big as 10.3 per cent in 2018 and gains of as big as 28.2 per cent in 2020.

As it faces narrowing fees following the entry of foreign players, “the asset management industry in China should strengthen its research capability, nature and improve its ability to pricing complex financial assets and earn relatively stable returns under the conditions of controlling risks”, the report added.

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