Earlier this week, The Wall Street Journal wrote a front-page article entitled, "Jack Ma's Giant Financial Startup Is Shaking the Chinese Banking System." While it didn't deal directly with the giant Yu'e Bao, it did have a number of mentions of Chinese money market funds. The article states, "It handled more payments last year than Mastercard, controls the world's largest money-market fund and has made loans to tens of millions of people. Its online payments platform completed more than $8 trillion of transactions last year—the equivalent of more than twice Germany's gross domestic product. Ant Financial Services Group, founded by Chinese billionaire Jack Ma, has become the world's biggest financial-technology firm, driving innovations that let people use their phones for buying insurance as easily as groceries, enabling millions to go weeks at a time without using physical cash."
The Journal explains, "That success is also putting a target on the company's back. China, even more than the U.S., is now under pressure to reckon with the disruptive power of a financial-technology giant. China's banks complain Ant siphons away their deposits, causing them to pay higher interest rates, and is a factor leading them to close branches and ATMs. One commentator at a state-owned television channel described Ant's huge money-market fund as 'a vampire sucking blood from banks.'"
They continue, "Chinese authorities, clearly increasingly uncomfortable about Ant's scale, have started to put limits on the activities it can pursue.... Regulators have issued rules requiring large money-market funds to sharply reduce holdings of assets that allow them to pay high interest rates. They have pressured Ant to slow inflows into its giant money fund."
The WSJ piece explains, "Employees came up with the idea of letting customers stash their idle Alipay money in an online money-market fund to earn income. The fund, known as Yu'e Bao, or 'leftover treasure,' allows Alipay users to invest as little as 0.01 yuan ($0.0015) and to transfer cash in and out without fees. More than a million people shifted money into the fund within days of its launch in June 2013, drawn by yields several points above what banks paid on short-term deposits."
It tells us, "Yu'e Bao generated returns by investing in high-yielding products riskier than those banks were allowed to tap. Industrial and Commercial Bank of China, the country's biggest bank by assets, responded to the instant popularity of the money-market fund by sharply reducing the amount Alipay users could withdraw in a single transaction. Other banks also tightened limits."
The article adds, "Yu'e Bao was a blow to banks because it sucked money from savings accounts, said Ma Weihua, then-chairman of Wing Lung Bank, in 2014. Some banks issued commercial paper to Yu'e Bao, incurring higher costs of funding. By then, Jack Ma had stepped down as Alibaba's chief executive (remaining chairman), and in 2014 Alipay rebranded itself as Ant."
Finally, the Journal writes, "In September, Chinese securities regulators said that some large money-market funds were 'systemically significant.' Without naming Yu'e Bao, regulators issued rules requiring large money funds to reduce holdings of their hard-to-sell assets. Ant's asset-management unit announced measures to limit inflows into Yu'e Bao and committed to paring its holdings of longer-term and riskier securities."
For more on Chinese money market funds, see our July 3 News, "Worldwide Money Fund Assets: Chinese MFs Jump Again, US Drops in Q1," our May 4 News, "China's Yu'e Bao Sees Assets Decline; U.S. Money Fund Assets Rebound," our March 28 News, "Worldwide Money Fund Assets: US Jumps in Q4, China Breaks 1.0 Tril," our March 2 News, "Assets Dip at Month-End, Prime Falls Hard; Bloomberg on Chinese MMFs Mar 2 2018," and our Sept. 14, 2017 News, "WSJ Calls Chinese Money Fund Yu'e World's Largest MMF; Still Going." Note too that our upcoming European Money Fund Symposium, which is Sept. 20-21 in London, will feature a session entitled, "`Chinese, Japanese and Australian Money Funds." (To those attending and staying at the Hilton London Tower Bridge, please make hotel reservations soon! Our discounted room block expires on August 6.)
In related news, last night Bloomberg published the piece, "Chinese Investors Pile Into Money Market Funds, Dumping Stocks," which says, "Chinese investors flocked into money-market products at a rate outpacing equities and bonds last quarter, adding to what is already the biggest segment of the nation's mutual fund industry."
They explain, "Mutual funds investing in low-risk, short-term debt instruments grew 5.4 percent last quarter to 7.7 trillion yuan ($1.1 trillion), compared to the 3.7 percent increase in bond funds and a drop of 1.3 percent in equity funds, data compiled by the Asset Management Association of China show."
Bloomberg writes, "After a shadow banking crackdown shrank the pool of investment products in China, money market funds are seen as a safer investment as trade war uncertainties weigh on stocks, while offering returns close to those of bonds. While Chinese equities have rebounded from their lows and corporate notes jumped last month amid a government shift toward easing, analysts say money-market funds will continue to be attractive to retail investors."
The article adds, "China's money-market funds have nearly doubled in size from 2016, making it the world's second-largest market behind the U.S., according to UBS Asset Management. Money-market funds accounted for 61 percent of the nation's mutual funds at the end of June, data from the association showed, with China International Capital Corp. estimating individuals account for more than half of that investment."
