Samuel Shen and vidya ranganathan

Shanghai/Singapore (Reuters) - New rules for China's active funds announced this month will dramatically change fund traffic on the country's stock market, prompting some of the largest players in the industry to take immediate action to introduce fresh products.

China Asset Management (ChineAmc), China Merchant Fund and E Fund Management said they have applied for or soon applied to launch so-called variable expense products where fees are related to the performance of the investment.

Variable expense investment products - currently rare in China - more closely align the interests of fund managers with investors. If funds are not performing well, expenses will rise if they are not effective.

In the words of China Securities Regulatory Commission Wu Jin, the new rules aimed at promoting Warren Buffett-style long-term value investment are the biggest overhaul of China's $4.5 trillion mutual fund industry in decades.

China's aggressive capital has long been criticized for pursuing profits from expenses and focusing on short-term investments rather than focusing on performance and creating long-term value.

"Previously, many mutual fund managers have contributed their interests with investors ahead of time ... to volatility in irrational markets," said Dong Baozhen, chairman of Beijing-based asset manager Lingtong Shengtai.

In addition to forcing the introduction of variable expense structures, the rules require portfolio managers to cut sharp cuts, and they perform less than 10 percentage points or higher in a three-year period.

"This will push fund managers to switch to more appropriate benchmarks, or build a more balanced portfolio" to avoid underperforming," said Yu Zhanchang, fund manager at Penghua Fund Management. ”

High funding and China's wider business world have been under scrutiny since authorities began to crack down on Xi Jinping's "common prosperity" drivers. Some fund managers began to limit annual income and recovered excessive salaries last year.

Under the new rules, the success of a fund will no longer be ranked by profits or assets under management, but by its performance and investor satisfaction.

Dong of Lingtong Shengtai said he expects the new regulations “will trigger a major directional shift in fund traffic, moving towards index heavyweights such as banks.”

Banks accounted for 3.8% of China's active fund portfolio at the end of the first quarter, well below the 13.7% weight in the industry's CSI 300, which is a broad benchmark.