ASSETS under management in China's mutual fund industry shrank in the first six months of 2013 due to the slump in the country's stock market in June when the worst liquidity crunch in a decade emerged, an industry report showed today.

The total AUM in China's fund industry decreased to 2.44 trillion yuan (US$400 billion) in the first half of the year from 2.79 trillion yuan reached at the end of 2012, representing a decline of 12.5 percent, Z-Ben Advisors said in the report.

The Shanghai-based consulting firm attributed the decline to the plummeting equity market last month, which saw the Shanghai Shenzhen CSI 300 Index fall 15.6 percent, the biggest monthly drop since August 2009, as hiking lending costs among interbank market triggered fears about a liquidity crisis.

"As market sentiment plummeted amongst an undeniable bearish China-outlook, both retail and institutional investors retreated to bond funds or withdrew from the industry altogether," said the report.

Money-market funds suffered the most, with a huge loss of 49 percent in managing assets in the first half of the year, due to large amount of redemptions in the first quarter and the mass outflows in the second quarter as "investors retreated and instead chased the unusually higher yields available in deposits and the repo market", according to the report.

Total fundraising from new products launched in the first half of the year fell to 350 billion yuan from 408 billion yuan in the second half of 2012, a drop of 14.2 percent.

The consulting firm said fund management companies preferred to launch short-term bond funds, which help them to raise significant assets initially but are subject to heavy redemptions.

"We eventually expect more companies to wise up and launch funds with longer-term outlooks, however this is unlikely in the second half this year, which may remain volatile," said the report.