China takes action to plug investment flood

NEW YORK — Chinese regulators have begun limiting the amount of money that asset managers can raise during a fund’s launch period, generally to about 10 billion renminbi ($1.3 billion).
With millions of Chinese investors clamoring to move money into newly launched funds from savings accounts, the regulators are concerned about massive and rapid infusions of liquidity into the country’s stock markets.
This new regulatory environment has caused some Chinese fund management companies, including joint ventures between U.S.- and China-based money managers, to return billions of dollars to investors after having fund launches last month that exceeded expectations.
China International Fund Management Co. Ltd., for one, raised 90 billion RMB — a whopping $11.65 billion — for its CIFM China Consumption Fund in a single day from more than 1.5 million investors. However, the company, a joint venture between JPMorgan Asset Management Ltd. and Shanghai International Trust and Investment Co. Ltd., had been given a 10 billion RMB quota in March by the China Securities Regulatory Commission in Beijing before launching the fund.
As a result, Shanghai-based China International was forced to return about $10.4 billion it accumulated from new investors April 10, according to Charlotte Li, a marketing official for China International.
“Any fund that is launched today will raise its capped limit,” Peter Alexander, founder and principal of Shanghai-based asset management consulting firm Z-Ben Advisors Ltd., wrote in an e-mail.
The Chinese asset management industry recently hit the 1.14 trillion RMB mark after a 33% increase in assets under management in the first quarter and a 55% increase in the fourth quarter last year, according to a new report from Z-Ben Advisors.
Such strong demand for funds also was on display when Lord Abbett China Asset Management Co. Ltd. of Shanghai introduced its first fund in the country — which also exceeded its quota in a matter of hours and had to close to new investors after one day.
Zane Brown, a partner at Lord Abbett, said that the company raised about 15 billion RMB on April 17 when it launched its China Value Advantage Fund, almost twice its quota of 8 billion RMB. (This fund had a lower cap than the China International launch, because it was Lord Abbett China’s first fund in the country.)
“Being in this market is an exercise in patience,” Mr. Brown said, adding that Lord Abbett China originally had been scheduled to launch its new fund in December, but regulators temporarily froze new fund launches because of investors’ exuberance.
The latest developments in China represent an ironic twist: Dozens of U.S. and European asset managers have been drawn to China in recent years because of its massive growth potential and underdeveloped money management industry. But now that this potential is rapidly materializing, the opportunities are being limited by regulators.
Money management executives in China said those limits are in the best interests of the industry and the market’s future. By putting too much money into a fund, it makes it more challenging for managers to invest in a wide range of Chinese equities and maximize performance, said Desmond Chan, chief executive of AIG-Huatai Fund Management Co. Ltd., a Shanghai-based joint venture between New York-based AIG Global Investment Group and Huatai Securities Co. Ltd. of Nanjing, China.
“If there is too much money in a fund, it is difficult to invest in anything other than large-cap stocks,” said Mr. Chan, who added that a 10 billion RMB limit is an appropriate level for fund launches.
Others noted that the limits could present some new opportunities for Chinese money managers to guide investors toward established funds.
Andrew Lo, chief executive of Invesco Asia Ltd. in Hong Kong, said that Chinese investors tend to flock to new funds and quickly redeem their assets once they have made money on their investments.
In some cases, these redemptions can be dramatic, causing large shifts in a fund’s assets under management.
With fewer fund launches and less room to invest in new funds, Chinese money managers have the chance to emphasize sales of established funds, Mr. Lo said.
“It gives us, and it gives investors, the opportunity to focus on recurring sales rather than just a fund’s [initial public offering],” he added.