February 2018

China’s recent robust economic growth has confounded cynics, demonstrating that the country could successfully balance the conflicting challenges of ensuring financial stability while decelerating the growth of debt. A combination of a continued global recovery, robust local property markets and improved household consumption all helped the government achieve its 2017 growth target. At the same time, the hawkish monetary policy bias and macro prudential measures from the People’s Bank of China (PBoC) has started to curtail the growth of the shadow banking sector, while also reducing financial risks.

The pace of Chinese regulatory reforms quickened, highlighting the seriousness of the authorities in their efforts to tackle the financial imbalances facing China. Individual regulators closed loopholes and tightened controls within their industries, while under the auspices of the PBoC the main financial regulators introduced¹ new unified rules designed to reduce regulatory arbitrage and minimize the risk of a systemic crisis.

This background of tighter financial regulations, improved economic stability and higher interest rates allowed renminbi cash investors to enjoy high returns, a stronger currency and reduced volatility in 2017. By the end of last year, the Chinese money market fund industry saw assets under management (AUM) jump by 60% year-on-year² to a record high of CNY 7.14 trillion (USD 1.1 trillion) and represented 62% of total fund industry assets. The AUM of triple-A rated money market funds also hit a record high as the gap between CSRC and triple-A fund guidelines and yields narrowed.

While achieving strong growth remains important to ensure social and economic stability, the Chinese government is now confident enough to focus on the quality rather than quantity of growth, with 2018’s goals emphasizing poverty alleviation, financial stability and pollution reduction. This implies growth should moderate further as the authorities continue to pursue tighter fiscal and monetary policies to further deleverage and de-risk the financial system.

So what does this mean for renminbi cash investors in 2018? A more stable economy and currency should keep negative headlines at bay while continued monetary policy tightening should ensure market driven interest rates and money market fund yields remain attractive. Traditional asset management products will also benefit as investors switch from regulatory constrained trust and wealth management products.

Despite the optimistic outlook for the Chinese economy, tighter financial controls and higher interest rates escalate the risks of a monetary policy or regulatory mistake. Investor complacency could also be challanged if a myopic drive to deleverage the financial system triggers increased credit stress, potential downgrades or even defaults among heavily indebted issuers. Therefore cash and money market fund investors should remain vigilant and continue to focus on their key goals of liquidity and security when selecting investments, counterparties and liquidity funds.

To find out more, please visit www.jpmgloballiquidity.com

1. China Securities Regulatory Commission, China Banking Regulatory Commission, & China Insurance Regulatory Commission.

2. Source: Wind Financial Data as at 31 December 2017.