Chinese mutual funds that were previously swelled with funds inflow now suffer a setback: retail investors are pulling money from the poorly performing stock market.

The drop in demand for mutual funds is caused by the drop in the once hot Shanghai stock market that lost nearly a third from its peak in April 2004. The benchmark index is at a six-year low, squeezing returns from mutual funds.

"Fund managers are pretty angry and frustrated, because it’s hard to do well when the index is falling," said one executive at a Shanghai-based fund management joint venture. As a result the Chinese investors are taking their sizable savings pool out of the stock market.

Another concern that weighs on the Chinese stocks is the extensive state ownership of Chinese shares: so far the government accounts for roughly two-thirds of the companies’ capital.

The funds outflow is going to affect the Western firms that established joint ventures with Chinese partners to offer mutual funds, like HSBC Asset Management that was expected to launch a fund this summer in partnership with a local company, or BNP Paribas Asset Management that scooped up a meagre $84.7 million through is newest fund launched in December in contrast to the $822.3 million collected by the fund started in April. Merrill Lynch could only pull in $128.4 million through its fund launched in late December, almost half of the expected amount.

Credit Suisse First Boston and several other banks that were planning joint ventures in China might rethink their intentions.