Chinese money fund Yu'e Bao, the largest money fund in the world at approximately $166 billion, will implement a maximum amount of about $40,000 on accounts, we learned from a Reuters article entitled, "Ant Financial's Yu'e Bao to cap personal accounts." It explains, "Yu'e Bao, a money market fund under China's Ant Financial, will impose a cap on individual accounts at 250,000 yuan ($36,475), amid tightening regulatory oversight of China's financial markets. The cap, which comes into effect from May 27, will apply to new investments but not existing accounts, Tianhong Asset Management Co Ltd, which is majority owned by Ant Financial and manages the fund, said in a statement on its website." We review this, as well as an article in today's Wall Street Journal, "Chinese Banks Face Up to Funding Squeeze," and a study from the Reserve Bank of Australia.
The first piece, posted by Business Insider, tells us, "Set up in 2013, Yu'e Bao, which translates literally as "leftover treasure", had 1.14 trillion yuan ($166.27 billion) of funds under management at the end of the first quarter, making it one of the biggest money market funds in the world. Ant Financial, which confirmed the cap, is the payment affiliate of Alibaba Group Holding Ltd."
Reuters writes, "The move comes as China looks to curtail financial risks amid growing concerns over high levels of debt. Moody's downgraded China's credit ratings this week for the first time in nearly 30 years, saying it expected the financial strength of the economy would erode in coming years as growth slows and debt continues to rise.... Chinese regulators have issued a flurry of measures to clamp down on the shadow banking sector in recent months, while the central bank has raised short-term interest rates."
The article adds, "Following its launch, Yu'e Bao initially had a cap of one million yuan, but this was removed at some point, leaving it with no maximum or minimum limit on accounts. It has around 325 million investors, the vast majority of which are individuals. An Ant Financial spokeswoman told Reuters the decision was made by Tianhong and said that it was related to the fund's product placement, targeting smaller individual investments."
The Journal's piece tells us, "Much of the money pulled out of conventional deposits is being invested in the rapidly multiplying population of investment funds, which offer higher rates. Yu'e Bao, run by Alibaba-backed Ant Financial, has become one of the world's biggest money-market funds -- with $165 billion under management—offering investors a 7-day annualized rate of over 4%."
It adds, "Ironically, it and other funds are achieving such returns by investing in financing tools issued by banks. When China liberalized deposit rates in 2015, banks started churning out new investment products, including so-called negotiable certificates of deposit. Issuance of these short-term products in April totaled $180 billion, up 60% from a year earlier. Their relatively high rates -- up to 4% or 5% -- have made them attractive to money-market funds like Yu'e Bao."
In related news, the Reserve Bank of Australia recently wrote a piece entitled, "The Rise of Chinese Money Market Funds, which discusses the rise of Yu'e Bao and money funds in China. Kate McLoughlin and Jessica Meredith write, "Money market funds (MMFs) pool funds in an investment vehicle to invest in short-term, highly rated securities. The MMF sector in China has grown rapidly over the past few years and is now the world's second largest by assets, though it is small compared with China's domestic bank deposits."
They explain, "This growth has been driven by investors attracted by high yields relative to bank deposits and technological developments that allow Chinese MMFs to offer a convenient cash management service. Chinese MMFs differ from similar products in many other countries: they tend to be more leveraged, and they offer more liquidity and maturity transformation. Nonetheless, recent regulatory reforms to address vulnerabilities have taken a similar direction to reforms globally."
The Australian Reserve Bank study continues, "MMFs have become increasingly important to China's financial markets over the past few years. Since January 2013, their combined net asset value (NAV) -- the value of a fund's assets minus its debt liabilities -- has grown by nearly eight times to around CNY3.6 trillion and the number of MMFs has more than quadrupled to around 295. By comparison, banking system deposits have only grown by around 1.6 times over the same period. Nonetheless, the value of MMFs' net assets has been broadly stable since late 2015, possibly because investors were shifting into wealth management products (WMPs) in response to the low returns paid on MMFs relative to WMPs."
It explains, "Products marketed as MMFs pool funds in an investment vehicle, with investors in MMFs receiving units (or shares) in this vehicle. MMFs invest largely in short-term, highly rated securities and are generally considered to be low-risk and low-return products with high liquidity. In this regard, MMFs serve as important intermediaries between short-term borrowers (such as governments and corporations that issue highly rated securities) and lenders (retail and institutional investors) who are seeking low-risk and liquid short-term investments."
Finally, the piece adds, "The emergence of MMFs in China has occurred in the context of the rapid evolution of the broader market for investment products. Other products that have grown rapidly include WMPs, non-MMF mutual funds and products offered by insurance companies and securities firms.... This article provides some background on Chinese MMFs before discussing who invests in these funds and potential reasons for their rapid growth. It then outlines MMFs' asset allocations and their importance to Chinese short-term funding markets, before assessing potential vulnerabilities."
Note: Crane's Money Fund Symposium, which takes place June 21-23 in Atlanta, includes the session, "MMFs in Ireland, France & China, which features Reyer Kooy of IMMFA, Alastair Sewell of Fitch Ratings, and Jonathan Curry of HSBC Global A.M.
