A Watershed Moment for China’s Fund Industry
China’s mutual fund industry is undergoing its most significant transformation in decades, moving beyond superficial fee reductions to fundamentally reshape how managers, distributors, and investors share risks and rewards. This fee reform initiative represents a systemic shift from scale-driven growth to performance-oriented sustainable development, with profound implications for the entire asset management ecosystem. The changes signal regulators’ commitment to aligning industry practices with investor interests while enhancing the quality of services in China’s rapidly evolving capital markets.
Key Developments in Fund Fee Reform
Three-Phase Reform Implementation
The China Securities Regulatory Commission (CSRC) initiated this comprehensive reform in July 2023 with the “Mutual Fund Industry Fee Reform Work Plan.” The approach follows a deliberate three-phase sequence: management fees, trading fees, and finally sales fees. This structured progression ensures systematic implementation while allowing the industry time to adapt between stages. In May 2025, the CSRC reinforced this commitment through the “Action Plan to Promote High-Qquality Development of Public Funds,” specifically advocating performance-based floating management fee models.
Floating Fee Funds Gain Momentum
The most visible manifestation of the reform has been the successful launch of two batches of innovative floating fee funds. These products represent a fundamental departure from traditional fixed-fee structures by directly linking manager compensation to investment performance. The initial batch of 26 funds raised approximately 25.9 billion yuan collectively, with average fundraising of about 1 billion yuan per fund—significantly outperforming conventional actively managed equity funds. Early performance has been impressive, with several funds including Invesco Great Wall Growth Partnership, Harvest Growth Win-Win, and Yinhua Growth Smart Select delivering returns exceeding 15% since their establishment approximately two months prior.
Floating Fee Mechanisms Evolve and Expand
Structural Innovations in Second Batch
The second batch of floating fee funds demonstrates continued innovation in product design. Investment strategies have diversified beyond broad market approaches to include sector-specific and thematic funds such as China Construction Bank Medical Innovation, Oriental Red Pharmaceutical Innovation Mixed, and Huatai-Pinebridge Manufacturing Theme Mixed funds. Perhaps more significantly, fee adjustment thresholds have become more stringent. While most floating fee products use performance benchmarks of “outperforming by 6 percentage points for fee increases and underperforming by 3 percentage points for fee decreases,” the Huatai-Pinebridge Manufacturing Theme Mixed Fund tightened its downward adjustment threshold to underperformance of just 2 percentage points—placing greater performance demands on fund managers.
Path to Normalization and Expansion
Industry sources indicate floating fee products are transitioning from pilot programs to常规化审批 (regular approval processes), with potential expansion beyond equity funds to include “fixed-income plus” products. Regulatory guidance reportedly encourages major fund companies to issue two floating fee products for every fixed-fee product launched. This policy direction ensures the new fee structure will become increasingly prevalent across the fund landscape. As one executive from a large fund company explained: “The extension of floating management fees to ‘fixed-income plus’ products may lead to clearer product strategy positioning. Low-volatility ‘fixed-income plus’ products could maintain lower fixed management fees, while high-flexibility versions might adopt floating fees with more aggressive strategies seeking higher returns.”
Sales Fee Reform Imminent
Comprehensive Changes Ahead
Following management and trading fee reforms, attention now turns to the third phase: sales fee restructuring. Industry sources anticipate imminent release of draft regulations covering sales service fees, which may include unified reductions in sales service rates, lowered trailing commissions for institutional channels, and comprehensive elimination of sales fees through direct channels. These changes will fundamentally impact fund distribution economics. A senior executive from a major fund company analyzed potential impacts: “Sales fee reductions may temporarily diminish the relative advantages of fund businesses. As fund distribution income declines, insurance, wealth management, and private fund products may appear more attractive to distribution channels in the short term.” However, they noted that in the broader context of financial service fee reductions, all business lines will eventually experience similar compression, leveling the competitive landscape long-term.
Strategic Responses to Sales Fee Changes
Fund companies are preparing strategic responses to the coming sales fee reforms. Many have committed to actively implementing regulatory guidance by adjusting product fee structures, reasonably reducing subscription fees and sales service charges. For proprietary platforms, companies plan to implement transaction fee discounts or introduce low-fee share classes to decrease investor trading costs. The emphasis is shifting toward service orientation, enhancing customer operation capabilities on proprietary platforms, and creating integrated investment platforms that improve user experience. JiYu Fund revealed its approach to the sales fee reduction trend: “We’ve transformed pressure into motivation to upgrade our institutional service system through two major adjustments. First, we’re actively adjusting our product structure, transitioning from primarily fixed-income products toward multi-asset and equity products, while strengthening research on innovative products like low-volatility equity-containing offerings. Second, we’re advancing from transaction-based to configuration-based business transformation, providing clients with more comprehensive professional asset allocation services.”
Addressing Three Fundamental Industry Challenges
Realigning Manager-Investor Interests
The fee reform initiative addresses three core challenges that have plagued China’s fund industry. First, it corrects the misalignment of interests between fund managers and investors. The floating management fee model directly links manager compensation to investment performance, creating authentic alignment and shifting focus from scale to performance. This addresses the longstanding issue where managers benefited from asset growth regardless of investment outcomes.
Resolving Conflicts and Sales-Driven Practices
Second, the reforms address potential conflicts of interest, particularly through trading fee reforms that mandate separation of research costs from transaction commissions. This creates greater transparency in research and trading expenses while encouraging broker selection based on execution quality rather than research kickbacks. Third, the sales fee reform targets sales-driven practices by pushing the industry toward buyer advisory models. By reducing upfront sales incentives, the reforms compel distribution channels to transition from earning transaction commissions to providing long-term asset allocation services and collecting advisory fees, thereby aligning their interests with long-term client asset appreciation.
Industry Perspectives on Reform Impact
A Shenzhen-based fund company noted that industry fee reduction possesses endogenous momentum: “As investors, particularly institutional investors, become increasingly familiar with ETFs, low-fee index funds have significantly enhanced appeal, increasing investor cost sensitivity. Meanwhile, intensified market competition forces fund companies to reduce fees to gain market share.” While fee reductions may pressure fund company profits short-term, lower fees ultimately help attract long-term capital (such as pension and insurance funds), contributing to stable scale growth long-term. Morningstar China Senior Analyst Dai Jingxia (代景霞) observed: “The public fund industry’s comprehensive fee rate has been relatively high, long increasing investor burdens. Fee reform through reduced management fees, custody fees, and transaction commission rates can genuinely decrease investor costs. Simultaneously, it can somewhat alleviate the phenomenon of fund companies making money regardless of market conditions.”
The Reform’s Second Half: Ecosystem Cultivation
Encouraging Diverse Fee Models
As fee reform enters its “second half,” the focus shifts from rule adjustments and cost cutting to the more challenging task of cultivating a new industry ecosystem deeply aligned with investor interests. First, fee model innovation should embrace diversity rather than uniformity. As asset management tools serving diverse investors, mutual funds feature complex product spectra and varied strategies. Regulatory guidance should encourage exploration of多元化的 (diversified) and差异化的 (differentiated) fee models. Beyond expanding floating fee products, the industry is exploring more flexible approaches such as “fixed management fee + performance fee” structures or establishing scale-linked tiered fee mechanisms for index funds and other instrument products. Regardless of form, the essential principle remains making fees genuinely reflect management difficulty, risk assumption, and value created for investors while providing market participants greater innovation space.
Systemic Support and Evaluation Reform
Reform success depends on supporting systems evolving in concert. Fee reform essentially represents profound adjustment of industry interest distribution mechanisms, inevitably affecting established assessment and evaluation systems. If fund company performance evaluations仍然以规模为纲 (still prioritize scale), and external evaluation rankings remain obsessed with short-term performance chasing, then fee reform’s original intention of guiding the industry back to performance orientation and long-term philosophy may be undermined. Consequently, evaluation system reform becomes imperative. Regulators, fund companies, rating agencies, and media should collaboratively advance systematic optimization of assessment systems, placing long-term performance, investor returns, and risk control indicators in more central positions, allowing truly excellent managers who create long-term value for investors to stand out.
Building Mature Buyer Advisory Ecosystem
Finally, and most fundamentally, the industry must cultivate a mature buyer service ecosystem. Sales fee reform directly targets the industry’s long-standing channel dependency and sales-driven practices, aiming to扭转 (reverse) the industry’s development logic from seller sales to buyer service. This represents a long-term project requiring persistent effort. Fund companies and distribution institutions must abandon short-term thinking and solidly invest resources in advisory capability development and investor education. This transformation may create transition pains, particularly for smaller institutions, but represents the necessary path toward high-quality industry development. If the first half of reform saw regulators “breaking the old” with thunderous momentum, the second half tests the entire industry’s wisdom and patience in “establishing the new.” In this process, abandoning one-size-fits-all approaches in favor of分类施策 (categorized implementation),系统配套 (system support), and培育生态 (ecosystem cultivation) through refined thinking becomes critical to reform progressing steadily and reaching its destination.
The Future of China’s Fund Industry
China’s mutual fund fee reform represents more than just cost reduction—it embodies a fundamental restructuring of how the industry operates, compensates service providers, and serves investors. The expansion of floating fee products and impending sales commission changes signal a new era where performance and investor outcomes take precedence over pure asset gathering. While transition challenges remain, particularly for smaller players adapting to new business models, the reforms ultimately promise a more sustainable, transparent, and investor-friendly fund industry in China. As these changes unfold, market participants should monitor regulatory developments, assess how different fee structures affect their investment goals, and engage with fund companies that demonstrate genuine commitment to alignment of interests. The transformation of China’s fund industry serves as a case study in how regulatory guidance and market evolution can combine to create better outcomes for all stakeholders.