“What does China’s money market fund landscape look like today, and what developments are likely in 2022?”

Aidan Shevlin

Head of International Liquidity Fund Management

J.P. Morgan Asset Management

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.

Yuanyuan Li

Head of fixed income HSBC Jintrust, Fund Manager, HSBC Jintrust Money Market Fund

HSBC

What does China’s money market fund look like today?

Since renminbi money market funds were first introduced in mainland China in 2004, the sector has been growing in both size and significance.

As of November 2021, there were 330 registered MMFs in mainland China, with RMB9.4trn in (AUM), representing around 38.77% of all types of asset AUMs. The MMFs serves as an intermediary between borrowers seeking short-term funding and investors searching for a low-risk cash management solution. MMFs play a very vital role in short-term, fixed income capital markets.

While there is a large number of MMFs in mainland China, the industry is concentrated. The top ten funds concentration has decreased gradually since 2013: the top ten funds accounted for over 64.20% of assets in 2013, but the figure was 24.77% by the end of November 2021.

In the past, retail investors preferred wealth management products and bank deposits, whereas institutional investors were limited to products offered by banks. After the introduction of MMFs, while retail investors welcomed this product, they seldom pay attention to the risk control of MMFs. As for institutional investors, they are more interested in MMFs for their higher safety margin nature, as well as their high liquidity and market yield characteristics.

The rapid growth of MMFs in the market has sped up regulatory tightening. In 2017, CSRC published regulatory requirements for all the open-ended mutual funds, and also imposed stricter regulatory requirements on MMFs such as WAM and WAL, single asset investment limitation, credit quality, single entity exposure etc, which aimed to reduce the financial disintermediation and increase the stability of China’s MMFs.

Benefiting from the rising focus on the safety margin of MMFs in the mainland China market, the fund size of HSBC Jintrust MMF has grown steadily since its inception in 2011. HSBC Jintrust Money Market Fund has a strict risk control process, and is suitable for corporations with RMB surpluses in mainland China. The investment objective is to maintain the low risk and high liquidity of its assets and seek to achieve a yield that is higher than that of its benchmark: RMB seven-day call deposit rate.

What developments are likely in 2022?

In 2021, due to the low interest rate environment, hybrid bond funds which include a certain portion of equity assets, also known as “fixed income plus” products, have become more popular among investors. We believe the trend will continue in 2022.

The performance of the fixed income plus products beat market expectations in 2021. As of October 2021, according to data from Wind, the median performance of hybrid bond fund was 4.2% and bond fund-II was 4.10%, beating the performance of long-term pure bond fund (2.99%) and short-term bond fund (2.67%).

We think this trend will continue in 2022, as 2021 was the last year for transitioning wealth management products from being valued on an amortised-cost basis to a net asset basis. Those investors who focus on lower risk and stable performance will likely turn to invest in fixed income plus products.

As at 3rd December 2021, there are six interbank AAA NCD index funds registered in mainland China. This is the first time that the interbank AAA NCD index has been introduced. The interbank AAA NCD index fund’s risk characteristics is in between traditional MMFs and short-term bond funds, with normally a seven-day holding requirement. It provides a new tool for those investors who are risk-averse while seeking a yield return that is a bit higher, as its underlying assets are AAA NCD issued in the mainland China market.

There is a potential risk arising from the mismatch between yield and time under amortised-cost valuation. As such, some regulations are implemented in order to control the usage of the amortised-cost method. The interbank AAA NCD index fund is suitable for those investors who focus more on cash management solutions, and we expect this product is likely to become more popular in 2022.