Funding & Investing

Asia’s MMF market awaits rate changes

Published: May 2024

After a buoyant 2023 that saw strong inflows into Asian money market funds (MMFs), the market is awaiting the impact of expected interest rate changes. However, even as rates come down, MMFs remain an attractive option for investors.

Stacks of coins increasing with a life buoy

In recent months money market funds (MMFs) in Asia have seen bumper inflows, boosted by central banks across the region – and beyond – deciding to keep their rates on hold, and driving investors to MMFs while rates remain relatively high. The current positive mood surrounding MMFs, however, is expected to subside as interest rates come down and observers are waiting to see the impact the expected rate cuts will have on inflows to the funds.

Back in February, Moody’s had a stable outlook for MMFs on a global level, following a year of record-high inflows during 2023. The ratings agency expects rates to come down – in line with most industry observers – but this does not necessarily mean the funds will experience dramatic outflows. Given the geopolitical uncertainty in the current environment, such as the conflicts in Ukraine and the Middle East, MMFs still remain a viable option for investors that are seeking a safe place to park their cash.

In Asia, MMFs also experienced a strong year in 2023. Aidan Shevlin, Head of International Liquidity Fund Management, J.P. Morgan Asset Management tells Treasury Today Asia that, like global MMFs, Asian funds have also witnessed strong inflows over the past several months. This was supported, he explains, “by a combination of elevated short-term interest rates and the continued desire to diversify away from bank counterparty risk.”

Inflows to Asian MMFs, says Shevlin, have been driven in part by volatile fixed income returns, which has come from central banks appearing comfortable keeping base rates higher for longer. He notes that these trends have been especially strong in Australian dollar, Singaporean dollar and Hong Kong dollar funds across both corporate and retail investors.

There are certain markets in Asia that have been performing particularly strongly and seen significant inflows. Cerulli Associates, in its Asian Monthly Product Trends notes that in October 2023, for example, the increased inflows were led by Taiwan, South Korea and India with respective inflows of US$26.9bn, US$16.8bn and US$4.3bn.

Cerulli notes that the inflows in Taiwan were possibly driven by improvements in its technology exports and manufacturing. In terms of the figures for the whole year, Taiwan’s inflows were significant and assets under management (AUM) rose dramatically by 11% to TW$864bn by the end of 2023, according to Fitch Ratings.

MMFs in China

In China, which takes up the lion’s share of the MMF market in Asia, the picture is complex because of the state of the domestic economy as well as the impact of various regulatory reforms which have now taken hold. Cerulli Associates notes that the top ten MMF managers in Asia are all based in China, and two of the largest funds by AUM in Asia can also be found in the country. For this reason, whatever happens in China’s MMF sector will likely have an impact and be felt around the region.

China has, however, mirrored the global and regional trend and has seen substantial inflows into to its MMFs. Shevlin notes that despite lower interest rates in China, MMFs also recorded record high AUM because of weaker consumer confidence and negative returns on property and other asset classes.

China’s domestic economy has been challenging, especially with the continued woes in its property sector. As well as this, Fitch Ratings also notes that there is a deteriorating outlook for China’s banking sector, which is of concern because of the large portion of money funds that are exposed to the banking sector. For example, at the end of the third quarter of 2023, 70% of the money fund market was exposed to the banking sector. However, it’s not all doom and gloom and Fitch Ratings notes that despite the challenging operating environment, MMFs are less affected because of the short duration of their funds and also their focus on large banks. It also expects assets under management to grow steadily in the coming months.

The concern with the banking sector is not limited to China and is a trend that has been seen at a global level. According to Moody’s, prime MMFs, which mostly invest in bank securities, will be impacted by the outlook for the global banking sector, which is negative for 2024. It notes that the banking sector has been affected by relatively low economic growth and higher interest rates, which has limited the demand for lending.

MMF outlook in context

In context, the global MMF market doesn’t look either good or bad for the months ahead. In giving its neutral outlook on a global level for MMFs, Minyue Wang, Director at Fitch Ratings, states: “Fitch’s neutral sector outlook reflects generally neutral credit environment supported by outlooks in key banking sectors, as well as MMFs’ investable universe consisting of mostly high-quality banks which tend to have stronger rating headroom. We also expect overall balanced industry flows for most of 2024 across regions, and limited impact from regulatory changes subsequent to their 2023 finalisation.” She adds: “We will continue watching the impact from changes in market conditions under the backdrop of funds selectively extending maturity while maintaining high liquidity levels.”

In China, weak consumer confidence and volatile returns of other investments have continued to support inflows.

Aidan Shevlin, Head of International Liquidity Fund Management, J.P. Morgan Asset Management

In a report released in March, Fitch Ratings projected that MMF flows – on a global level – will stabilise in 2024 after the record inflows of 2023. The inflows in 2023 were dramatic. For example, at a global level AUM stood at US$9.9trn at the end of 2023, which was a significant 17% increase from the year before. China also saw a large increase with the inflows, with MMF assets under management rising 8% over the course of 2023 to CNY11.3trn. There was a record high of CNY12.2trn of AUM in the middle of the year before they declined to the year-end figure. Fitch Ratings notes that it does not expect the recent regulatory reforms that have taken hold in China to have a significant impact on overall flows in the coming year. However, if central banks cut rates quicker than expected, this could drive a faster pace of outflows, the ratings agency noted.

Impact of regulation in China

China’s MMF market has been subject to a number of regulations, and industry observers have been watching keenly to assess their impact. Shevlin at J.P. Morgan Asset Management explains that Chinese regulators have steadily tightened MMF regulations because of the increasing importance of MMF and the systemic risk the large funds pose to the economy. For this reason, the regulations that have been introduced have focused on liquidity and security. “The latest rules focus on the largest MMFs, deemed systemically important, requiring even tighter investment and diversification rules, which would imply even lower yields, potentially reducing the attractiveness of MMFs,” Shevlin says. However, in line with the view of Fitch Ratings, this has not had a negative impact on the attractiveness of Chinese MMFs. “Weak consumer confidence and volatile returns of other investments have continued to support inflows,” explains Shevlin. He adds: “Meanwhile, the large e-wallet providers have increasingly diversified inflows across a pre-approved panel of smaller MMFs, with yield-based rankings designed to attract retail investors.”

A general trend has been observed whereby the largest MMF funds in China have been losing their dominance and the industry is seeing a diversification, and competition, enter the market. Fitch Ratings noted back in June 2023 that the Chinese market previously had more concentrated risk than other markets around the world, and the regulatory efforts to reduce this were expected to impact on profitability. The agency noted in a report that the shift away from concentrated risk could impact the fee revenue of the fund managers because they usually earn this based on the size of the assets under management.

Much attention was focused on Yu’e Bao, which was the largest fund and regulators sought to rein it in. The regulators moved in 2021 to limit the size of funds and the rules they introduced came into effect in 2023. Funds that were deemed a ‘major’ are subject to additional scrutiny, and the rules apply to funds that have AUM of over CNY200bn or more than 50 million individual investors. As a result of the regulations coming into force, the market share of the largest funds has decreased and according to Fitch Ratings, Yu’e Bao shrunk in size. At the end of the first quarter of 2023, its market share stood at 6.2%, which was a decline from 7.7% the year before. Meanwhile the share of the top five MMFs declined to 13.7% from 15.4%. This compares to the heyday of the largest MMFs in China when Yu’e Bao had a market share of 30% and the top five took 60% of the market in 2014. Fitch Ratings notes that with the current trajectory, the concentration of the players in the markets is more similar to that found in other markets around the world. However, compared to other MMF markets, such as US and Europe, Fitch raises other issues with China. “We think liquidity and credit risks remain in China’s MMF sector on a relative basis, as regulations allow MMFs more leeway in their operations than in the US and Europe, including the ability to leverage up to 20%, which is not the case for US and European MMFs. We believe the majority of Chinese MMFs use leverage, although the amount for any particular fund is likely to be limited.”

Looking ahead

With MMFs benefitting from the inflows of the previous year, now attention is turning to what will likely happen as interest rates start to come down. Shevlin notes that with global inflation trending downwards, there is a broad consensus that central bank’s base rates have peaked, although it remains uncertain when rates will be cut. Nevertheless, he explains, investors are availing of the opportunity presented by the current elevated short-term interest rates to lock in attractive yields slightly further out the curve. “At present, the highest yields are available in securities with maturities between six to 18 months. These securities also offer minimal risk should interest rates remain volatile while also offering the potential for capital gains when central banks start to cut base rates. We have seen cash inflows into ultra-short duration strategies picking up in the past few months as total returns of these strategies started to out-pace money market funds,” Shevlin says.

In the coming months, the market will continue to assess how quickly central bank rate decreases will come, and what the impact on the MMF market will be, and whether – in the face of other factors – the fund will continue to be an attractive option for investors.

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