China’s equity market is on the edge of a storm as the expiration of mutual fund lockups threatens to unleash a wave of turmoil. With billions of yuan trapped in stock funds over the past three years, frustrated investors now face the opportunity to seek alternative investment avenues away from equities.
This impending surge in selling adds to the mounting concerns already dragging down investor sentiment in the market.
June’s warning from Shanghai Banxia Investment Management Center, one of China’s premier macro hedge funds, seems to be materializing as net outflows from three-year mutual and private funds become inevitable. This exacerbates the existing downside risks faced by the market, which is already grappling with an economic slowdown and a scarcity of new fundraising opportunities.
Fund manager Yang Ruyi from Shanghai Prospect Investment Management Co. predicts a forthcoming wave of redemptions as investors eagerly await the expiration of lockups.
The need for liquidity and the desire to recoup losses incurred by the funds are driving investors to explore new investment avenues beyond equities.
The securities regulator has attempted to bolster market sentiment by recently reducing stock mutual funds’ management and custodian fees.
Also, they have pledged to encourage institutional investors to increase their equity allocations through funds. China International Capital Corp. estimates that this move could result in the industry ceding more than 50 billion yuan, or 16% of its revenue, to benefit investors.
The performance of stock-related funds with lockups has been disappointing, as revealed by data from Morningstar.
Since their inception, the 38 funds launched in 2020 with a three-year lockup have recorded an average loss of 0.4%, with less than half of them posting any gains.
Similarly, the 13 funds established in 2021 with a two-year lockup have all experienced losses, averaging a decline of 13%. Adding to the concerns, the 185 products with a one-year lockup expiring this year are down by an average of 3.3%.