China's CSRC Plans Fund Industry Overhaul to Boost Long-Term Returns
1h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
china-market-reformmutual-funds
Fazen Markets Editorial Desk
Collective editorial team · methodology
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China's securities regulator announced plans on 6 June 2026 for a comprehensive overhaul of the nation's asset management industry. The China Securities Regulatory Commission's initiative aims to shift the $3.9 trillion mutual fund sector towards generating sustainable, long-term investment returns for retail and institutional clients. The proposed measures include restructuring fund manager compensation and revising fee models to better align incentives with investor outcomes. This regulatory pivot marks the most significant intervention in the industry's fee and incentive structure in over a decade.
The CSRC's latest move follows a multi-year period of regulatory scrutiny on fund performance and sales practices. In 2021, the regulator issued guidelines discouraging performance rankings based on short-term returns, a common marketing tool that fueled speculative flows. China's mutual fund industry has ballooned in size, with assets under management growing from $2.1 trillion in 2020 to an estimated $3.9 trillion as of Q1 2026, according to industry association data.
The current macro backdrop is defined by a search for stability in Chinese equity markets. The benchmark CSI 300 Index has delivered an annualized return of approximately 2.1% over the past five years, underperforming global peers and leading to investor dissatisfaction. Low market returns have pressured fund managers, whose compensation has remained heavily tied to assets under management rather than performance.
Direct pressure from the State Council to improve household wealth outcomes catalyzed this regulatory action. Chinese households hold an estimated 60% of their financial assets in bank deposits, a high ratio that policymakers aim to reduce by creating more attractive long-term investment products. The overhaul seeks to channel domestic savings more efficiently into productive capital markets.
The scale of the industry targeted for reform is immense. China's public fund sector managed 28.8 trillion yuan ($3.9 trillion) across 11,800 products as of the end of April 2026. Active equity funds, a primary focus of the reforms, account for roughly 35% of this total, or $1.36 trillion in assets.
Performance data reveals the challenge. Over the three years ending May 2026, only 41% of active equity funds in China outperformed the CSI 300 Index, according to Wind data. The average management fee for active equity funds stands at 1.5% of assets annually, while performance-based fees are rare, applying to fewer than 5% of funds.
A comparison of fee structures highlights the misalignment. Before the proposed reform, the typical fee is a flat 1.5% of AUM regardless of performance. After reform, a potential new model could feature a base fee of 1.0% with an additional 20% performance fee on returns above a benchmark hurdle. Peer comparisons show the global asset management industry average fee for active equity is 0.73%, according to Morningstar, while the US mutual fund average is 0.42%.
Fund manager turnover remains high, with an average tenure of just 4.2 years for equity fund managers in China versus 7.8 years in the United States. This short-termism is exacerbated by compensation structures where over 80% of a manager's pay is derived from AUM-based revenue.
The regulatory shift is a structural positive for large, domestically-focused asset managers with established research capabilities. Firms like E Fund Management and China Asset Management Co. stand to benefit as scale and investment process stability become more valuable. Conversely, smaller funds reliant on marketing short-term performance to gather assets face pressure to consolidate or improve their investment teams.
The overhaul will likely redirect capital flows toward sectors with durable competitive advantages and stable cash flows. Consumer staples, healthcare, and select industrial leaders within the A-share market should see increased institutional ownership. High-beta, speculative sectors that thrive on retail momentum trading may experience reduced support from professional managers focused on new long-term metrics.
A key risk is that the reforms could initially reduce industry profitability, leading to cost-cutting in research and potentially lowering overall market liquidity. If performance-based fees fail to compensate for lower base fees, asset managers may seek riskier strategies to generate outsized returns, creating new systemic concerns.
Positioning data from prime brokers indicates increased net buying by long-only domestic funds in large-cap A-shares over the past week, anticipating the regulatory clarity. Short interest in smaller, high-PE growth stocks has risen modestly as investors price in a potential rotation away from speculation.
The CSRC will release detailed draft rules for public consultation by 1 August 2026. Market participants will scrutinize the proposed calculation methodology for performance fees, particularly the benchmark selection and the high-water mark provisions.
The first major test of the new framework will be the Q3 2026 fund flow and performance reports, due by the end of October. Analysts will monitor whether the announcement accelerates a shift from money market funds into equity products ahead of the rule implementation.
Key levels to watch include the CSI 300 Index resistance at the 4,200 level, a breach of which would signal strong institutional conviction. Sustained outperformance of the SSE 180 Index of large-cap stocks versus the ChiNext Index of growth stocks would confirm a rotation into the quality and stability favored by the new regime.
Retail investors, who comprise over 80% of fund ownership in China, should see a better alignment of their interests with fund managers. The shift towards performance fees means managers get paid more for generating positive returns. This reduces the incentive to simply gather assets through aggressive sales. Investors may also see more product innovation, such as funds with longer lock-up periods that allow managers to execute long-term strategies without facing redemption pressure during market volatility.
Performance fees have existed in China's private fund and wealth management product sectors since around 2015, but were rarely adopted in the public mutual fund industry. The closest precedent was the 2018 pilot for Floating Rate Funds, where management fees varied with a fund's return ranking among peers. That pilot had limited success due to complex calculations. The new proposal appears to draw more from international models, like the fulcrum fee structure used in some US funds, where fees adjust symmetrically for outperformance and underperformance versus a benchmark.
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