An Overview of China's Fund Industry(2)

　　3. Michael Porter's Five Forces Industry Overview

　　3.1 Customers' Power

　　China’s fund industry has two types of clients: retail clients and institutional clients. Retail clients have over 16 thousand billion USD bank saving de posit, while the total market value of fund industry is only 25 billion USD by the end of October 2005. The lackluster market and fund performance over the last three years saddened the retail investors.

　　Before the market took a northbound direction in August 12, many open-end fund companies activated a “life saving trick” --paying dividend. The rational behind that is: after going through so many market ups and downs, retail investors perceive fund price above 1 RMB as profit taking signal. They prefer to sell the funds before market takes another nose-dives. When fund manager pays out the dividend, the fund's price will dip below the one RMB psychological threshold

　　Most Chinese keep their money in the bank deposits; some put their moneyotniinsurance products; some others invest more in real estate. But they kept a watchful eye on the market. Recently E Fund Company raised 1.4 billion USD on its Mid and Short Term Debt Fund, an indication that retail clients are in favor of the low-risk low return products, especially when the launching of new money market funds are put on hold by CSRC.

　　Different from U.S. the institutional clients of fund companies in China are mostly insurance company and asset management companies of major industrial group; they can easily drop a ticket with 10 million USD to one new fund. Their relationship with fund companies started back in 1997 when only closed-end funds were available. However, they are not loyal customers of any kind. When open-end funds became available, insurance companies started to use funds like short-term trading instruments, and refused to pay the sales and redemption charge.

　　Recently, China Insurance Regulatory Commission (CIRC) summoned 5 fund companies to discuss the criteria insurance companies should go by on fund company selection. Some attendees of the discussion revealed that CIRC wants to set the minimum of assets under the one fund company management above 500 million USD. They put a high priority on the safety of the principal, high dividend pay out and absolute return on investment; while in the community of fund managers, performance against benchmark is commonly accepted.

　　3.2 Securities industry - Suppliers' Power

　　Securities industry is confronting its own challenges. Illegal borrowing money from clients’ account and over-promise return on asset under management has drained the securities companies’ credibility. Some of their hard earned cash from their retail brokerage outlets were paid out as compensation awarded by the court in favor of clients' allegation.

　　China’s stock market has 1381 listed companies, and a ban on new IPO has not been lifted till the end of 2005. The total capitalization is about 125 billion USD by the end of October 2005. According to some of the fund managers, only 300 of them can be qualified in the fund companies' stock pool; and just 100 or so may be selected in the core stock pool; the total number actually used in the portfolio are the so called “Nifty 50”. This is the universe Chinese fund managers live in.

　　3.3 Rivalry Among Competitors

　　Fund companies are competing for performance, new product development as well as the distribution channel relationship. In 2001, the top 30% fund companies took the 45% of the management fee and a market share of 47%. In the mid of 2005, the top 30% fund companies took the 67% of the management fee and a market share of 72% .

　　The disgruntling voices from the fund companies on the third edition of in one aspect are a reflection of the competition among fund companies. The was triggered by the fact that CSRC received too many complaints indicating that fund companies are offering to the investors the same investment products . In this edition of the agreement, fund companies are required to submit their portfolio composition on the real time basis to the custodial banks, but most of the banks with the custodial license are allowed to set up their own fund companies soon. Any one with a clear conscience will question the validity of the firewall within the custodial banks.

　　3.4 Threat of New Entrants

　　With only 12.5 million USD as registered capital, and two or more shareholders with securities industry credential and no securities violation record can apply for a fund company license. Nowadays, CSRC will approve the stock fund application fast because the market needs more fresh money to pump up the buying momentum . Three of the state-owned banks – Industrial, Commerce Bank, Communication Bank and Construction Bank already launched their first funds.

　　Insurance companies are ready to launch their own mutual funds. The only requirement is the establishment of an asset management company before the registration of a fund company. So far, Ping An Insurance; China Life; People's Insurance Company of China; Huatai Insurance already have their own asset management companies.

　　The threat from the new entrants to the existing fund companies is not immanent when the names of the big shareholders are the only card in hand, but it becomes legitimate with the extended distribution network is at the new players’ disposal.

　　3.5 Threat of Substitute Products

　　Real estate investments of different kinds have been a viable competition of fund products. For some investors the return on the real estate investments has been much more stable.

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