China’s fund management industry has been a major beneficiary of the country’s stock market revival. Total assets under management has rocketed but most funds have still underperformed the Shanghai Compostite Index in 2007. There are 29 Sino-foreign fund management joint ventures, the first of which was China Merchants Fund Management (CMFM), a tie-up between ING and China Merchants Securities. It currently has about US$8.8 billion under management. The ownership structure was recently adjusted as China Merchants Bank (CMB) came in as major shareholder alongside China Merchants Securities and ING. Chris Ryan, CEO of ING Investment Management Asia Pacific, talked to CHINA ECONOMIC REVIEW about the prospects for mutual fund market.
Q: Some fund management companies have already launched Qualified Domestic Institutional Investor (QDII) funds to target foreign equities. What is CMFM doing on this front?
A: We understand there are about 20 applications for QDII funds [as of October] and ours is one of those.
Q: How well do you think these QDII funds will fare?
A: The experience of China Southern Fund Management [which saw its fund fully subscribed within hours of launch] has boosted confidence in QDII funds. One of the major difficulties has been a lack of familiarity with foreign assets and also perceptions about the renminbi. Although China has relaxed the renminbi’s trading range, it is very difficult to hedge the foreign exposure without incurring costs that wipe out a lot of the returns that you would achieve. Underpinning this are the prospects for the US currency. If the dollar slips, that puts more pressure on the renminbi to rise relative to the dollar and other currencies. People looking at QDII have to be very conscious of US dollar exposure and consider other kinds of assets – commodities and other currencies, particularly Asian currencies.
Q: What changes have you seen in the kinds of funds that are popular?
A: Any fund out prior to 2001 was likely to be a closed-end fund. After that, open-ended funds became the favored vehicle but, if you go back to 2003-04 when Chinese markets weren’t doing well, money market funds proved very successful. Once you get a build of cash, it is subject to rotation into the equities market and that’s what happened in 2005-06, with a lot of money going from money market to equity funds. Recently we have seen an increase in subscriptions to money market and bond funds, as some investors are concerned about the high level of the market, particularly institutional investors.
Q: Is there concern that the rapid increase in funds management could lead to instability and greater risk?
A: Fund penetration in China is still only about 3% of total savings, which is incredibly low compared to other countries. Relative to the total market capitalization of the stock market, investment is more significant. This is why the government is pushing things like QDII, to move away from just investing in Chinese-listed stocks. There is a lot of wealth creation going on in China so rapid growth is to be expected. In Japan, the Nikkei Index went through 1,000 points at the end of 1968 and, at the time, the yen was about 470 to the US dollar. Now the Nikkei is about 17,000; the currency is 415 to the US dollar. Multiply that through and you’ve made roughly 60 times your money over 40 years. Based on the Japanese experience, the renminbi is going to rise. If you go back to newspaper articles from when the Nikkei was at 2,000 or 3,000, you’ll see the same kind of ‘this can’t last’ attitude from the rest of the world.
Q: So do you don’t think that a bubble is emerging in the Chinese markets?
A: Bubble is a very emotive word. I do think the domestic markets are at a very high level but earnings growth is strong. If higher than rational prices are going to exist, they are going to exist in an environment in which inflation is low and earnings are very strong. You’ve got that now so it’s not surprising that prices are higher than analysis would indicate.
Q: Why have China funds underperformed the market so far this year?
A: There is a large volume of funds hunting a limited volume of stock. When markets are running hard, it’s difficult to keep up with the index because liquidity in individual stock issues varies so much – you have massive buying and massive turnover while the price is going up and then liquidity hangs in the air. Now, of course, institutional investors are looking at risk controls. Absolute return is important; relative return is important; but they are only two factors in the decision. For retail investors, it is about nominal return rather than index return.
Q: What do you make of claims that Chinese investors don’t really understand what they are investing in?
A: On March 29 we launched a new equity fund and I happened to be in Beijing. One of our partners suggested that we go to a bank and talk to some customers. One lady, a retired teacher, told us that she was investing in equity funds because she couldn’t live on her savings and pension alone. She said, ‘I know some will go up by 60% and some will go down by 20%, but on average I need to get 15% on my savings to live.’ She wasn’t speculating, she was deciding what returns she needed from her savings to support her lifestyle, and using an equity fund as part of the way to achieve that. Our experience in China is that people learn about things very quickly.
Q: Government announcements seem to be able to move the market at will. Is Beijing’s level of influence unhealthy?
A: This happens everywhere – the US, UK, Australia – but because some of what happens in China is unfamiliar, we tend to sensationalize it. In Australia in the late 1970s, we had a very high inflation rate, unemployment above 10%, a currency fixed to the British pound (and then to the US dollar) and speculation in the stock market. The way the Australian market was conducting itself at the time was no better than how the Chinese market conducts itself today. I think the government has consistently outperformed people’s expectations in terms of how it has managed the stock markets.
Q: What will ING gain from CMB entering the fund joint venture?
A: We’ve always distributed through CMB and its entry into the joint venture presents a lot of opportunities. There are several areas of significance. The first one would be that as CMB grows we hope to grow our distribution partnership with them. There are many more possibilities for cooperation between the fund management company and the bank – QDII, corporate annuities and other areas of asset management. Between CMB, our two life insurance joint ventures and CMFM, we have the full set of licenses. Having these pieces closely connected enables us to take advantage of many different aspects of the China financial services market.
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