After more than a year of flat AUM, the second quarter of 2017 saw money market mutual funds reach a record RMB5.1trn ($740bn) from RMB4.5trn at the end of March.
“Over the long term Chinese MMFs still have potential to further grow because the ratio of MMF assets to broader money (M2) in China significantly lags those in the western countries,” Li Huang, analyst at FitchRatings, the author of the report, told FSA.
Money market mutual funds now make up about half of China’s $10trn mutual fund market by AUM. By comparison, the share of money market funds in the US is only 13.7%.
The large market share of the asset class has been attributed to the multitude of investors who have switched from domestic bond funds to the minimum-risk money market products.
Money market funds, on average, yielded close to 4% annually in June 2017, according to the report.
Three large products
The products have been growing in number. There were 352 money market funds in China at the end of March 2017. The number is up from 89 in December 2015.
In the past year, the asset class has shown contradictory trends. On the one hand, the average size of a money market fund shrank to around RMB12.7bn ($1.84bn) in March 2017 from RMB17.4bn ($2.6bn) at the end of 2015, according to the report.
On the other hand, the asset concentration in money market funds has been increasing, with the three largest funds accounting for a third of the market.
At the end of June 2017, the largest money market fund Yuebao, managed by Tian Hong Asset Management and distributed chiefly to retail investors through the e-commerce platform Alibaba, held RMB1.43trn in assets. It accounted for 28% of the market and was held in 325 million accounts on Alibaba’s Alipay platform. It is the largest money market fund in the world.
The second largest manager of money market funds in China is ICBC Credit with RMB340bn in AUM, with two funds that had 7.6% of the market at the end of March.
While such domination of the market by three products raises concerns about liquidity risk in the event of significant redemptions, FitchRatings points to another source of concern, coming from tailor-made products created for a single institution or a few large institutional investors.
The second largest fund in the market, the ICBC Credit Suisse AnYin Money Market Fund, is owned in 99% by three institutional investors.
Such products are particularly vulnerable to liquidity shortages in case of large redemptions by their main investors, which may lead to price distortions of the underlying money market instruments.
China’s money market funds invest predominantly in short-term deposits, negotiable time deposits and repurchase agreements (repos). Around 30% of the exposure is to bonds. Over 90% of funds had a weighted average maturity below 90 days.
After issuing money market fund regulations in 2015, the China Securities Regulatory Commission (CSRC) followed up with a consultation paper in March 2017, aiming to strengthen liquidity management of funds targeting a few large institutional investors.
The new rules would apply to funds that allow one investor to hold more than 50% of the fund. They specify, among other requirements, that at least 80% of such funds must be invested in securities maturing within 5 days, and only 5% can be invested in those maturing in more than 10 days.
While the differences among funds lie predominantly in liquidity and maturity management, according to the report, tighter regulations are likely to make money market funds in China more homogeneous.