Fitch Ratings lifts some of the mystery surrounding Chinese money market funds in a new report, entitled, "Chinese Money Market Funds: Growth Set to Slow." The update, authored by Charlotte Quiniou, Director of Fitch's Fund and Asset Manager Rating Group, charts the explosive growth of the money market funds in China over the last two years and looks at where they are headed. Quiniou writes, "Chinese MMFs have experienced a rapid expansion since mid-2013, after 10 years of slow development since the first Chinese MMF was launched in 2003. At the beginning of 2015 there were 231 active MMFs in the market with total assets of CNY2.2trn (USD353bn), more than six times total assets of CNY360bn at end-2Q13. China was the fifth-largest MMF domicile globally according to ICI as of end-3Q14. The number of the MMFs has increased at a steady pace despite periodic industry outflows. Assets are largely concentrated in a small number of large funds; two of them -- Tian Hong Zeng Li Bao (Yu'E Bao) and ICBC Credit Suisse MMF -- have assets over CNY100bn, while 45% have less than RMB1bn of assets."
She continues, "The largest five asset managers in MMF assets represent more than half of the market (51% compared with 43% in 2Q13). They typically provide investors with MMFs of various features (credit quality, duration, distribution channels) to meet different investment objectives. The sharp and fast expansion of Tian Hong Asset Management (THAM), through its Tian Hong Zeng Li Bao fund linked to Alibaba's online investment fund (Yu'E Bao), raised the company to the top position in MMF assets managed since 4Q13. The fund was launched in June 2013 and can be bought through online payment via Alipay. The market share of THAM in MMFs peaked at 35.3% in 1Q14, from only 1.4% in 2Q13. That fund is almost exclusively retail driven and reached CNY579bn at the beginning of 2015."
Fitch writes, "As this fund and other e-commerce related funds are primarily retail focused, their asset bases may be less stable than those of institutional money funds.... Other market leaders experienced multi-fold increases in their MMF assets after the mid-2013 market downturn. Many MMFs offer shares for retail investors (share A) and institutional investors (share B). MMFs are typically distributed both online and via more traditional channels."
Further, they comment, "Fitch rates six Chinese MMFs, five of them managed by asset managers, which are joint ventures between local companies and established western firms, and one by a security firm. These MMFs target institutional investors and differentiate themselves from the retail MMFs with more conservative strategies, higher credit quality, shorter maturity and stronger diversification guidelines. Fitch believes that an international JV partner may give these funds a competitive advantage in servicing international corporates with RMB cash management needs given their typical global presence and experience in managing MMFs in other jurisdictions –notably Europe, the US and Australia. All of them are rated AAAmmf(chn) on the national scale, which reflects the funds' strong capacity to achieve the investment objective of preserving principal and providing shareholder liquidity. This is done through limiting credit, market and liquidity risk, relative to all other short-term investments in China."
Fitch adds, "The spurt in MMF growth over the past 18 months was mainly driven by retail demand. Retail investors accounted for almost three-quarters of Chinese MMF assets as of 2Q14 compared with the almost even split between retail and institutional investors in mid-2013. Retail demand has been driven by attractive MMF yields relative to bank deposit rates, ease of access and limited alternative investment opportunities. Internet technology development has made the purchase of the funds more convenient and rapid. All of the big three Chinese internet and E-commerce companies (Baidu, Alibaba and Tencent) have their own asset management partners and provide MMFs, which can be purchased and redeemed online. Institutional demand for money market funds is growing albeit at a slower pace than retail demand. The liberalisation of the Chinese domestic market and the internationalisation of the Chinese renminbi have attracted more institutional investors. Multinational companies are increasingly accepting Chinese MMFs as an effective cash management product diversifying counterparty risk. CIFM MMF, the largest Fitch-rated institutional MMF, has grown substantially during the past years to over CNY70bn (USD11.3bn)."
Quiniou explains, "The overnight SHIBOR (Shanghai Interbank Offered Rate) hit a record high of 13.44% during the tight liquidity at end-June 2013. This led to a rise in MMF yields at the time, accompanied by outflows and pressure on the mark-to-market net asset value (NAV) of many Chinese MMFs, which are by nature heavily exposed to interbank and short-term bond markets. Certain unrated funds saw material mark-to-market declines in their NAVs… Three months later the market stabilised. By the beginning of 2014 just before the Chinese spring festival, the average yield of Chinese MMFs had increased to more than 5.6% and many MMFs realized an annualised seven-day average yield of above 6%. Money fund yields have declined since the Chinese spring festival in 1Q14, when the government injected liquidity into the market to bring down finance costs for the real economy. The PBOC cut the one-year deposit rate to 2.75% from 3% and the one-year lending rate to 5.6% from 6% in November 2014. The current average yield of the MMFs was around 4.5% at the beginning of 2015. Money fund yields are still higher than bank deposit rate despite an overall declining trend. They remain attractive to some investors for yield compared with other short-dated products."
She comments, "The asset allocation of Chinese MMFs in terms of security is homogenous given the regulatory framework and market supply. Differences between funds appear primarily in liquidity and maturity management as well as the degree of issuer selectivity. Instruments held include short-term bonds, bills (when available), term deposits, mostly negotiable and repos. Retail MMFs invest heavily in negotiable term deposits and bonds. Bonds have steadily gained weight since 1Q14, after a drop in 2H13, reaching late 2012 levels. Given that most of the bonds bear fixed rates and are of longer maturity than negotiable deposits, these funds have increased their sensitivity to potential interest-rate volatility."
The Fitch paper explains, "AAAmmf(chn)-rated funds (and similar) have a greater focus on short-dated assets of high credit quality, notably short-dated exchange-traded repos. This reflects their primary objective of providing investors with liquidity and principal stability, which often means lower yields compared with most retail-oriented Chinese MMFs.... There are some signs that asset managers have turned to longer-dated assets to increase MMFs' yields and stay competitive. 38% of the funds have a WAM longer than 90 days. Liquidity management is challenging for retail MMFs. In the event of large outflows, assets would need to be sold, potentially at a discount, if the primary liquidity of the funds itself were not sufficient to meet the redemptions. Yu'E Bao has steadily increased its WAM from 44 days at end-3Q13 to 93 days at end-4Q14, effectively almost doubling its duration risk. The AAAmmf(chn)-rated funds keep liquidity well under control with WAMs under 40 days as of end-2014."
Finally, the report says, "Fitch believes there could be greater differentiation of funds and asset managers in 2015 while overall yields are lower. While some funds will strive for higher yields, others will emphasise their conservative fund management style, experience (potentially including international experience for those fund managers with an international JV partner) and sound governance."
