(Yicai Global) Sept. 6 -- Under the shadow of pessimistic market sentiment, new funds in China are becoming increasingly difficult to sell, while old funds, public and private alike, are accelerating such procedures.

Some 48 publicly offered funds were liquidated last month, statistics from Chinese data provider Wind Data show, while some 261 funds have plans to have already entered the process this year. Some 2,595 private funds were wound up in the first eight months of the year, data from research firm SimuWang shows.

"Equity funds are difficult to sell, while newly issued funds also face mounting pressure," the general manager of a large Shenzhen-based public fund management company told Yicai Global, adding that older funds are finding it difficult to stay in existence across the industry.

Although participants in the fund industry argued that fund liquidation can improve revenue, optimize product lines and provide better services for investors, many of the moves made among privately offered funds were due to the sluggish stock market.

The 261 publicly offered funds cited by Wind Data include flexible allocation funds that mainly invested in the equity market, medium and long-term funds that invested in the bond market as well as passive index funds and monetary funds.

However, an insider from a Shanghai-based publicly offered fund manager told Yicai Global reporter that although there have been many fund liquidations, only 10 percent of them were stock funds, hybrid funds, index funds and QDII (Qualified Domestic Institutional Investor) funds that are closely related to ordinary investors. The rest of the funds were bond-focused and monetary funds that all met institutional investors' needs.

"The market should not over-interpret the liquidations thus causing a panic," the source said. "Through fund liquidations, fund management companies can sort out their product lines and bring together their best research and investment resources to better serve customers."

Most of the liquidated funds are "mini-funds" or "those are operated with high costs," a source from the marketing department of a Shenzhen-based public fund management company said.

"Many companies found that the costs of continuous marketing for keeping funds alive are high and some conditions have been put in place," the source said. "They found it makes no sense in making investments. Since many companies have been liquidated, there is less of a concern surrounding the practice," the general manager of a publicly-offered fund management company said.

"Liquidation is actually a kind of interest protection for fund holders," he continued. "For instance, since the total cost of a small fund is not low if taking into account the management, custodian and sales service fees, it is best for fund holders to go directly into liquidation."

"Many of the funds being liquidated this year are fund products set up by external institutions entrusted by banks," the publicly-offered bond fund manager of a public fund company told Yical Global. "The investment market is gloomy this year, and banks have little impetus to work with external institutions, which, coupled with the implementation of new asset management regulations, makes it necessary to further sort out the direction of banks' asset management business."

The stock market downturn triggers private equity funds to minimize losses through liquidation. The continuous decline of the main stock indices is a significant factor that has led to the increased liquidation of fund products. As of the market close on Sept. 5, the year-to-date decline on the Shanghai Composite Index hit 18.2 percent while that of the ChiNext Index was 18.4 percent. The market correction was far greater than what the investors had expected.

"There are two circumstances when the passive liquidation of a private equity fund is suitable," Fan Jihao, investment director of Guangdong Fulida Asset Management, told Yicai Global. The first circumstance when the fund product has touched the contracted stop loss limit, which is currently set at around 0.7 to 0.8 of the net value of the product. Due to the concentrated shareholding of some private equity funds, the stock market slide this year is very likely to cause the net value of such products to fall to the liquidation threshold.

The other circumstance is liquidation after the expiration of the fund contract. The private equity products generally have an investment period of 3 years, and a large number of products are set to expire this year.

There are also some products with a net value that has long been fluctuating around the stop-loss limit, which increases difficulties for the manager, Fan said. The manager usually chooses to liquidate the product as the continued existence of such a product will exert an adverse influence on the fund management company's brand.

Editor: William Clegg