Tighter monetary policy is prompting many of China’s money market funds to buy up bank debt in the search for higher yields, triggering concerns about the potential for systemic financial risk.
The Chinese money market fund sector has recently emerged as the world’s second largest after that of the US, with assets under management surging from 600 billion yuan at the end of 2012 to around 7.3 trillion yuan as of March this year.
Ant Financial’s Yu’e Bao is currently the world’s largest money market fund, with around USD$200 billion under management.
Money market funds have proven highly popular with China’s retail investors due to the high yields and safety they provide in a tightly constrained investment environment.
Further tightening of monetary policy by China’s central bank this year has put heavy pressure on yields, however, with average returns falling to an annualised 3.7% from around 4.5% at the start of 2018 according to a report from The Financial Times.
This pressure on yields has prompted many money market funds to purchase debt from Chinese banks, as part of efforts to retain the favour of retail investors with robust returns.
Research from Z-Ben Advisors indicates that one of China’s biggest money market funds, Shenzhen-based Yinhua Fund, had a 60% exposure to bank negotiable certificates of deposit as of the end of March.
Analysts point out that this new-found enthusiasm for bank debt could exacerbate systemic risk in China’s financial system, due to the copious volume of non-performing assets held by the country’s banks, as well as the exorbitant size of some its money market funds that make the largest of them systemically impotent.
The situation is made more fraught by the launch of new regulations that will push Chinese banks to recognise bad debt, in a move that analysts expect to lead to a 14% rise in NPL’s.