Modest equity fund inflows on low mutual fund sale volume。
    China fund companies recently released detailed 2Q10 AUM trend data. Somekey trends include: 1) equity and blended funds experienced continued modestinflows with balanced inflows/outflows for MM and bond funds, followingmodest inflows in 1Q10; 2) mutual fund transactions moderated further on a qoqand yoy basis amid weak A-share market; and 3) equity and blended fundsexecuted the largest equity position cut since 3Q08 amid global financial crisis.
    Equity positions reduced further; bank and broker positions cut。
    Fund managers further cut equity positions in 2Q10, and equity positionsdeclined to 77% and 64% of investable assets at China equity and blended funds,respectively, from 84% and 74% at the end of 1Q10. While equity positions atChina mutual funds are not at their lowest levels historically, the magnitude ofequity position reduction at both equity and blended funds was one of thelargest in recent years and essentially in line with the magnitude of equityposition reduction during 3Q08 amid the global financial crisis.
    Funds further cut bank and broker allocations to 10.0% and 0.4% of total equityholdings, respectively, from 11.9% and 1.1% in 1Q10, vs. 16% and 3.1%contributions to free-float A-share market cap. We believe this, combined withequity position reductions by funds in 2Q10, has led to weak performance ofbanks and brokers in 2Q10. Mutual fund allocations to China insurancecompanies increased modestly in 2Q10 to 3.5% of total equity holding from 2.6%at the end of 1Q10, but still below its free-float market cap contribution of 4.2%.
    Weak market led to AUM decline, but L/T opportunity promising。
    Total industry AUM at mutual funds declined 12.9% qoq due to weak Asharemarket performance (CSI 300 declined 23% in 2Q10), partly offset byAUM inflows and lower equity positions. Positively, GS ECS team’s view of apotential A-share market rebound and healthy, albeit volatile, equity marketreturn in the medium term and potential continued AUM inflow frominstitutional clients could drive promising AUM growth in the China fundindustry. As such, we continue to see CITIC Securities (600030.SS, Buy,Conviction list; Rmb12 .20) and China Merchants Securities (600999.SS, Buy;Rmb21.64) as the main beneficiaries of this trend, given their high net incomecontributions from asset mgmt business, which we estimate to be around 14%-15% of total net income in 2011E (7%-8% for CS pro forma the planned sale of51% stake in China AMC). Risks include 2H earnings misses; China macroovertightening.