The Chinese money market interest rate landscape has rotated substantially in 2021 as investors grappled with the implications of slower economic growth and the PBOC’s reluctant monetary policy pivot. Concurrently, money market funds (MMFs) witnessed strong inflows, despite increased competition from new products. In 2022, lower interest rates, a focus on climate change and the implications of looming asset management product rule changes will create challenges and opportunities for Chinese MMFs.
The interest rate pivot
From robust growth at the start of 2021, multiple factors negatively impacted the Chinese economy, translating a gradual slowdown into a sharp decline. The government’s commitment to deleveraging the property and shadow banking sectors, combined with Delta variant outbreaks, all magnified economic volatility and prompted expectations of fiscal and monetary policy easing.
Initially, hawkish PBOC comments pushed SHIBOR yields to year-to-date peaks in February. However, by the mid-year, the PBOC pivoted to neutral and then most recently a dovish policy stance. The central bank cut the Reserve Requirement Ratio twice; on both occasions it was foreshadowed by calls by Premier Li for monetary support for the real economy.
Anticipating these cuts, SHIBOR yields declined and the curve flattened throughout the remainder of 2021. The PBOC also focused on maintaining adequate liquidity, ensuring that repo rates were much more stable than in 2020. However, escalating property-related risks continued to negatively impact onshore credit spreads, which surged higher in the second half of 2021.
MMFs with long duration positions outperformed, but heightened expectations of additional monetary policy rate cuts next year have diminished the longer-term outlook for MMF yields. Given their focus on high quality investments, MMFs, especially triple-A rated funds, remained insulated from higher credit risks – although credit markets are likely to remain volatile in 2022.
The evolving asset management industry
Mutual fund assets under management (AUM) jumped to a new record high of CNY24trn, up 34% year-over-year (as at end Q321). While this was impressive, mutual funds still only represent 10% of the total bank deposits base (~CNY230trn) – although they have caught up on bank wealth management products (~CNY27trn).
In absolute terms, the biggest increase was in MMFs, which jumped 29% year-over-year to a new record high of 9.4 trillion – a strong rebound following declines in 2019 and 2020. MMFs still represent the largest asset class with 39% of total AUM, although this has continued to trend downwards from a peak of 67% in Q318 as other asset classes, have grown faster.
MMFs utilised by e-wallets continued to dominate, representing 49% of total MMF AUM – interestingly, these are now more diversified as regulatory concerns translated into more fund choice across these platforms. Institutional demand also remained strong, representing 38% of AUM, although the number of triple-A funds was unchanged – AUM growth was also robust as multinational corporations and large local institutional investors sought MMFs with good liquidity and security.
These growth trends are likely to persist in 2022 as ongoing pandemic and economic uncertainty encourage renminbi retail and institutional investors to hold elevated cash balances.
New rules, new competition
China’s Asset Management Product (AMP) Rules will finally come into force at the end of 2020 after a one-year delay. Originally announced in April 2018, the rules represent the most significant change to how China regulates its shadow banking sector since inception.
The new rules require banks to take their wealth management products (WMP) back on balance sheet, convert them to mark-to-market and, importantly, no longer guarantee returns. By the end of 2020, WMP outstanding had declined sharply as banks repackaged and resold these products via their new asset management companies, and this trend will continue into 2022.
Aside from the competition posed by new NAV-style asset management products, MMFs will also face challenges from new mutual fund products, including NCD Index Funds and ultra-short duration funds, offering different characteristics and features. The authority’s prioritisation of ESG factors, especially climate change and a focus on carbon neutrality, have likewise started impacting security issuance, fund developments and investor requirements.
Nevertheless, attractive returns, ease of use, high liquidity and good credit quality should help MMFs maintain growth momentum into 2022.