Chinese investment funds show good growth fundamentals, but regulations will slow growth in the near-term, ratings agency Moody's has warned.
Moody's Investors Service has reported measures imposed by the Chinese government to reduce risk in the financial sector will stem growth in the country's asset management industry in the near term, but strong fundamentals will support growth in the long term as the sector normalises.
A Moody's report, titled Investment funds China: Long-term trends are positive, stated even if regulation slows short-term growth China's asset management industry has expanded significantly in recent years with outstanding products originated by a broad range of asset managers exceeding RMB100 trillion (£11.67 trillion) at the end of 2017.
This growth has more than doubled in the past three years, Moody's reported.
However, Moody's reported non-traditional asset managers dominate this market, in particular, wealth management products from the banks and asset management products originated by trust companies.
This has meant that the intensified regulatory clampdown on broad shadow banking, which started in late 2016, has significantly slowed this growth - resulting in flat growth or even a decline in the assets under management.
the traditional fund sector (mutual funds and private funds), Moody's stated it expects to see incremental inflows of RMB 30 trillion (£3.5 trillion) to RMB 40 trillion (£4.6 trillion) in the next decade, a compound annual growth rate of 8 per cent to 10 per cent.
George Xu, an analyst at Moody's, said: "The explosive growth of China's asset management industry has increased financial system interconnectedness, as well as liquidity and credit risk, and in that regard we view the regulatory crackdown to reduce these risks as credit positive."
In the near term, Moody's expects growth to remain tepid as reducing risk in the financial system remains a top government priority in 2018.
However, Moody's views this as a credit positive development, as it will improve risk controls among both traditional and non-traditional asset managers, and in turn gradually lower systemic risk and improve the operating environment.
Speaking about what this means for investors, Mel Kenny, chartered financial planner for London-based Radcliffe & Newlands, said: "Regulation may stem the short-term tide of growth, but more importantly act to reduce the risk of a catastrophic fall out following the popping of bubbles as and when they come along in the future."
aamina.zafar@ft.com
