The People's Republic of Mutual Funds
One morning in September, employees of China's Bank of Communications had to fight their way past thousands of people to get into their Shanghai office building. The reason: The bank had been designated a sales agent for the Huaan Innovation Fund, China's first open-ended mutual fund. Investors had camped out at the bank office's door all night so they could be first to buy shares in this newest offering of the Huaan Fund Management Co., a Shanghai-based brokerage. Makeshift sales booths in banks and gymnasiums across the country were similarly mobbed. Within hours, the Innovation Fund had raised $600 million and was closed to further investment. "In China, people have quite a bit of enthusiasm for firsts," deadpanned Ernest Liu, the 32-year-old manager of the fund.
If all goes as planned, Liu won't be the only one offering such funds to investors. Beginning next year, Beijing is expected to allow many more local firms to launch funds and form joint ventures with foreign asset-management companies that are eager to provide investment and marketing knowhow. Some 15 multinationals, including Fortis Investment Management, HSBC, and INVESCO Asia, have already found Chinese partners. Soon after Beijing enters the World Trade Organization in mid-December, a foreign company will be able to buy up to one-third of a Chinese fund-management company and to increase that stake to 49% within three years. "We've got an agreement to get married as soon as we can," says Blair Pickerell, chairman of JF Funds Ltd., part of the Hong Kong-based J.P. Morgan Fleming group, which has signed a deal with Huaan.
The appeal of China to foreign mutual-fund managers is obvious. The Chinese have $850 billion stashed away in low-interest savings accounts, and many a saver is looking to shift into something with a higher return. For their part, Beijing regulators believe that the growth of mutual funds may help clean up China's opaque and poorly regulated markets. The hope is that the funds will attract more institutional investors and that they will insist on improvements in corporate governance. Also, the open-ended funds will be required to park 20% of their capital in government bonds, which will act as a brake on money managers harebrained enough to commit all their funds' money to speculative stocks.
GREENHORNS. Nothing is expected to give wary Chinese investors more confidence in the mutual funds than participation by foreign funds and banks. With foreign help, "we will have more exposure to international fund management and understand more about what is happening globally and regionally," says Liu, who like most of his peers has no fund-management experience. He worked as a research analyst in San Antonio before hiring on at Huaan.
The big problem for the nascent fund industry is that even the best-trained fund managers will be faced with a lineup of companies on the Shanghai and Shenzhen stock exchanges whose true value is unknown. Liu is aware of the problem. "We don't really have a lot of good companies to buy," he says. As a result, he plans to invest only a fraction of the Innovation Fund's $600 million in equities. Huaan can't disclose the fund's investments so far because a three-month blackout period is still in effect. But Liu says that so far it has outperformed the A share market by 2%.
Still, the ground is so swampy in China's markets that some foreign fund firms plan to stay on the sidelines. "I think that the gestation period is long," says Khiem Do, head of Asian equities at Baring Asset Management in Hong Kong. Because Chinese investors like to speculate in individual stocks, he says, foreigners in the mutual-fund market "won't make profits for five, six, seven years." Of course, if the mob scene in Shanghai is a predictor, the profits might be worth the wait.
By Bruce Einhorn and Alysha Webb in Shanghai