November 2017

In recent years, Chinese money market funds (MMFs) have thrived thanks to their ability to generate attractive yields vs. alternative investments (including bank deposits) and the convenience they offer investors. In fact, since June 2012, the number of individual MMFs has risen from 72 to 372, while assets under management have increased 13-fold to CNY 5.3 trillion (USD 815 billion) – a size that makes the industry systemically important¹.

A move up in assets has driven a move down the quality spectrum

But this robust growth been accompanied by a less welcome phenomenon. As MMF yields have declined due to lower investment yields, there has been a broad move by fund managers to boost dwindling returns by increasing leverage and investment concentration, while also taking a step down the credit quality spectrum to more illiquid investments. As a result, credit and liquidity risks have risen at a time when domestic defaults and cashflow volatility are on the up.

The three core goals of new CSRC MMF rules

On 1 September, the China Securities Regulatory Commission (CSRC) moved to address these problems by introducing new mutual fund guidelines. The new rules set out three core goals for MMFs:

• to reduce systemic risk concerns created by the rapid growth of MMFs
• to limit liquidity risk caused by high investor concentrations
• to control credit risk by reducing MMFs’ ability to invest in lower-quality investments

The rules came into force on the 1 October 2017 and give managers a six-month grace period to achieve compliance. But what do they really mean for the China’s rapidly growing MMF industry?

Part of a broader regulatory process

Taking a step back to look at the bigger picture, these rules coincide with recent efforts of the government and regulatory authorities to reduce the rate of growth of debt, deleverage the economy and avoid triggering a systemic financial crisis. The new CSRC MMF rules should help reduce the risk of a loss of confidence in the industry by encouraging funds to be more conservative by holding higher levels of liquidity, investing in better-quality assets and having shorter durations. However, the new MMF rules will also reduce the potential yields that MMFs can offer and the ability of individual fund managers to significantly outperform.

No impact on our own MMFs

The tighter limits on credit quality and concentration should have no major impact on our investment strategies or on the yields of our own funds because they already operate within the tighter internal J.P. Morgan Asset Management investment limits and AAA credit rating limits imposed by Fitch credit rating agency.

You can also download other Liquidity Insights from our J.P. Morgan Global Liquidity website www.jpmgloballiquidity.com. With its user-friendly navigation, you’ll find a seamless connection between liquidity investment solutions and our best thinking, which can help you meet your goals in today’s complex investing environment.

1. Source: WIND; data as of 31 August 2017