China’s IPO fundraising boom raises product concerns

China’s IPO fundraising boom is saturating the market with similar products, which has raised concerns over managers' fate if the equity bull market runs out of steam.

Fast product approval and soaring equity prices have driven fundraising for initial public offerings to a record high, with managers becoming dependent on the revenue generated by the funds.

A surplus of such products could also exacerbate an ongoing talent shortage, while increasing numbers of leveraged funds are expected to suffer if the market takes a turn for the worst.

Managers raised Rmb273 billion ($44 billion) through the launch of 82 new IPO products in April, setting an industry record for fundraising in a single month. In total, Chinese managers launched 211 new products in the first four months of this year, raising Rmb510.5 billion – this exceeded the Rmb407.4 billion raised by 347 new mutual fund launches in 2014, according to Shanghai-based consultancy Z-Ben Advisors.

Red Pulse, a Shanghai-based market intelligence firm, said it expects new IPO fund launches in the first half to surpass all other full-year totals.

Despite the soaring equity market fuelling retail investors’ appetite for new fund products, another factor at work has been the registration system which was implemented in August last year. The new system has shortened the approval time for product launches from six months to as little as 20 days.

January Sun, an analyst at Z-Ben, said plain-vanilla fund products can take only a month to be launched from the time they are submitted to the China Securities Regulatory Commission (CSRC) for approval. She added that CSRC approval usually takes two weeks and fundraising one week, and the fund can be launched one to two days later.

However, analysts are worried about the uniform nature of the new products as most are thematic or sector funds – for example, at least 13 fund managers have launched funds named “One Belt, One Road”, in a bid to capitalise on the Chinese government’s New Silk Road economic initiative.

“There are not so many good stocks in each sector for managers to choose from, so their asset allocation is pretty similar,” said Sun. These thematic funds actively invest into the same sectors or even passively track the same indices, she added.

Felix Ng, Singapore-based associate director at financial research firm Cerulli Associates, noted that Chinese fund companies have relied on new fund launches to retain assets in recent years, and banks have been part of the reason. “Given the equity bull market and number of IPO funds this year, it is a strong indication that banks will prefer to [sell] new funds because the volume they get is definitely favourable for their revenue,” Ng added.

Sun noted that Chinese investors prefer to subscribe to new funds rather than buy into old funds. But launching similar products could further intensify the problem of multi-fund management, apart from the problem of talent shortage, Sun added.

Another feature of the booming IPO fund market has been the large number of so-called "structured funds", unique to China, which have been launched in an attempt to provide leveraged products as well as different offerings. A structured fund is usually split into two classes, where Class A invests in low-risk instruments and provides low-yield return, but Class B will borrow and leverage Class A capital to capture higher return. A total of 22 structured funds have been approved this year, but 96 are pending for approval, according to CSRC data as of last week.

“It is quite unique to China, and one key reason is because the market is not very developed yet,” said Ng. “They cannot use derivatives like futures which are still in the very early phase [of development], and when they come to product structuring beyond the things they have already offered it provides investors with product differentiation.”

“[These structured funds] capture the upside of the equity market, but short-term volatility goes two ways - when market goes down, those leveraged funds will suffer,” said Ng.

The CSI300 index, a benchmark measuring both the Shanghai and Shenzhen Stock Exchanges, has increased 34.35% this year as of yesterday, making the China onshore equity market the world’s second-best performer in 2015, after Venezuela.

The China fund industry has grown 15.6% this year to hit Rmb5.24 trillion as of the end of March, comprising 96 fund companies and 2,027 products, according to data from the Asset Management Association of China.