China fund managers cut fees after pressure from regulator

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Big money managers in China cut fees on thousands of mutual fund products on Monday, in a swift reaction to a government drive to reduce rates across the country’s fast-evolving financial services sector. 

Fund houses were responding to a weekend statement from the China Securities Regulatory Commission (CSRC), which pledged to “guide the mutual fund industry to start fee-charging reform in a steady and orderly manner, and support the industry to adjust funds’ fee ratios reasonably”.

E Fund, the mainland’s largest mutual fund house by size, said it had cut the management fees for its 74 equity-focused funds to 1.2 per cent of fund assets from a previous 1.5 per cent, to “lower the wealth management cost of investors”. Custodian fees charged on a separate batch of 89 funds would be capped at 0.2 per cent of fund assets, it added.

China Asset Management, Bank of Communications Schroder Fund Management, the joint venture between state bank BoCom and British asset manager Schroders, and Zhong Ou Asset Management, now partly owned by US private equity group Warburg Pincus, all announced similar fee reductions in separate announcements.

The move, which has been expected for months, comes as Beijing pushes for more “people-oriented” reforms alongside a year-long “common prosperity” drive, in which regulators are also seeking to limit executive pay at banks and at fund managers to reduce the wealth gap. 

It also comes amid falling stock prices in China, which has added to pressure within the industry. The majority of ordinary Chinese retail investors are becoming more sensitive to fee charges with share gains no longer helping offset transaction costs. 

Foreign investment houses, including BlackRock, have rushed to exploit China’s nascent mutual fund industry, but the new pressure on fees is expected to raise questions about their exposure to government reforms.

“It was already the case that the risk premium applied to a China business was on the rise over the past 18 months,” said Peter Alexander, founder of Shanghai-based fund consultancy Z-Ben Advisors. “Now there’s downward pressure on the expected returns of running that business.” 

He added: “I wouldn’t go so far as to say that this move is somehow aligned with common prosperity, but I do believe that it is ‘common prosperity adjacent’.”

China’s mutual funds generally charge higher fees than their peers in developed markets. The average is 1.43 per cent of fund assets, according to an estimate by domestic brokerage Tianfeng Securities, compared with less than 1 per cent in the US, according to Morningstar. The industry collected a combined Rmb144bn ($19.9bn) in management fees in 2022, according to TX Investment Consulting.

The CSRC is expected to go further with fee reforms, according to the state-owned Shanghai Securities Journal, including rolling out fund products with floating fees and guiding for fee cuts in other products. The regulator expected total fees to be lowered by 26 per cent in equity-focused funds by 2025, from 2022 levels, the paper said.

Market insiders say the move will hit hard the smaller players who are more reliant on management fees.

“We definitely welcome the fee cut, as our firm would take limited blows given our scale in assets and expertise in investments,” said one executive of a large Chinese mutual fund house, who did not wish to be named. “But it could be a painful adjustment for smaller players.”