Fee reforms introduced by Chinese regulators in July are likely to influence multiple aspects of the mutual fund industry, going beyond cuts in management fees and custody fees to impacting company revenues, and creating the potential for consolidation. Despite the immediate challenges faced, both investors and the overall fund industry are expected to benefit from fee reforms in the long run, according to The Cerulli Edge—China Edition, 3Q 2023 issue.

On July 8, 2023, the China Securities Regulatory Commission (CSRC) issued a work plan for mutual fund fee reform to guide the industry in lowering fund fees in a reasonable and orderly manner. The reform proposes to reduce active equity fund fees by the end of 2023. Among the changes, newly registered products’ management and custody fee rates are capped at 1.2% and 0.2%, respectively. Existing products’ management and custody fee rates are to be reduced to the same levels.

Mutual fund managers have responded quickly and positively to the reforms. Soon after the measures were announced, 19 large managers took the lead in reducing the fund and custody rates of some of their equity funds, and other managers followed suit. As of September 5th, the number of managers that announced fee cuts topped 130, and the number of funds with reduced fees exceeded 3,500. Most of these are active equity products, although a small number of bond funds and index funds have also lowered custody fees.

In the short term, the fee reforms are expected to have a significant impact on fund managers’ costs. According to Cerulli’s preliminary estimates, the industry will see management and custody fees fall by about RMB14 billion (US$1.9 billion) and RMB2 billion after the stipulated reductions to 1.2% and 0.2%, respectively. Cerulli also expects that management fee income will drop by up to RMB1 billion, with 36 managers facing double-digit reductions. Compared with their management fee income at the end of last year, without considering the impact of asset changes in the first half of this year, the decline in total management fee income of large managers will average about 10%.

Several leading managers have been ranked highly by management fee income in the past few years, so it is likely that they will face greater pressure to cut costs and increase efficiency, but this can be offset by their large assets under management. On the other hand, small and medium-sized managers, especially those focusing on equity products, are likely to see profits squeezed. In the long run, they may need to make painful decisions on trimming their workforce or cutting salaries; some could even face the prospect of liquidation. With their relatively cheaper rates, better product performance, and more qualified talent, larger firms could further strengthen their leading positions, resulting in greater industry concentration and consolidation.

“In the short term, the fee reduction will lead to a decrease in managers’ income and further intensify industry competition,” said Joanne Peng, research analyst with Cerulli Associates. “In the long term, however, the reform is conducive to promoting high-quality development of the mutual fund industry, attracting medium- and long-term institutional investments and encouraging distributors to strengthen buy-side investment teams and better serve the wealth management needs of mass retail investors. Managers with outstanding investment and research abilities that can create value for investors in the long term will be able to compete effectively.”