Institutional demand for money market funds in Asia has been carried by a wave of rising inflation and interest rates, but the mood is expected to become more muted in the coming months. Meanwhile, China is on course to introduce MMF reforms that will bring greater stability to the market.
Inflation, rising interest rates, and fears of a recession have all meant that money market funds (MMFs) in Asia have been an attractive option for institutional investors, but that sentiment is beginning to wane. The demand for MMFs in Asia is expected to be more muted in the months ahead even though the long-term potential of the market remains huge.
MMFs were certainly attractive last year and Soo Ah Ran Cho, Associate Director at research firm Cerulli explains there are multiple reasons why institutional investors were choosing them. “The broad risk aversion in the public market in 2022 meant many institutional investors held off allocating to equities or alternative assets. This pause in mandate activities meant they hoarded more cash in money market vehicles.”
And since interest rates started to rise in the second half of 2021, and have continued to do so, parking funds in MMFs became even more attractive. “When risk-free interest is this attractive, the incentive to invest in higher-volatility assets diminishes,” says Cho.
Aidan Shevlin, Head of International Liquidity Fund Management, J.P. Morgan Asset Management, also comments how the environment has been favourable for MMFs. Now, however, investors are hoping that 2023 will be much less volatile as the pace of rate hikes moderates. “Across the Asia Pacific region, multinational and local companies are still holding large cash balances, due to a combination of renewed pricing power, robust profitability and a cautious economic outlook,” he says. He notes that higher yields have encouraged inflows into MMFs and assets under management have climbed rapidly since the start of the year. “Investors realise they no longer have to extend tenors or reduce credit limits to achieve attractive returns,” Shevlin adds.
Cho at Cerulli describes the allocation to MMFs as ‘skewed’ and expects this to subside to toward the end of this year and into 2024 as risk aversion subsides and a more settled recovery of the equity markets begins.
This more muted position comes within the context of a deteriorating outlook for MMFs globally because of the challenging economic environment. On releasing her global 2023 outlook report, Minyue Wang, Director of Fitch Ratings, said: “Fitch’s deteriorating sector outlook for MMFs in 2023 reflects expectations for deterioration in some key banking sector outlooks, continued market volatility and potential considerable flow and asset under management (AUM) dynamics. Evolving regulation around the globe is a key watch item, but should be accompanied by sufficient lead time for market participants to react accordingly.”
China is one such market where reforms are coming to the market, which will likely have a significant impact because China is the second-largest MMF market in the world. In August last year, China reached this status when it overtook Europe to account for 18% of the global total, second to the United States (which accounts for 55% of the market), and followed by Europe, which has 17% of the market.
The Chinese reforms have been in the pipeline for a while and the proposals from the China Securities Regulatory Commission have now been finalised and are scheduled to take effect this coming May.
Shevlin explains these rules will further tighten the duration, concentration and liquidity limits of MMFs with the goal of reducing the risk profile of the widely-distributed retail funds. “This brings China MMF guidelines even closer to their western counterparts, albeit with the likely impact of lower yields for RMB cash investors,” he tells Treasury Today Asia.
The regulations address a number of issues, and most attention has been drawn to the size and the concentration of distribution, which has been interpreted as a way to rein in the largest funds Yu’e Bao (managed by Tianhong Asset Management) and E Fund Cash Management, which have ballooned in size and popularity since their launch.
Yu’e Bao is a retail-only investor fund and there have been concerns that investors are not aware of the risks these funds carry – when compared to savings accounts, for example – and their size is feared to pose a systemic risk. At the end of June 2022, Yu’e Bao had CNY862bn in assets, accounting for 8.3% of the market, according to Fitch Ratings.
The upcoming rules define ‘important’ MMFs – ie those that will be subject to greater restrictions – as funds with AUM over CNY200bn or with more than 50 million investors. In the latest revision to the rules, however, regulators have more flexibility in how they apply the rules so funds other than the largest two could be affected.
Fitch Ratings notes that since 2015 Chinese MMFs have come closer to international standards but there is still a substantial discrepancy between MMFs in China and those in western markets. Of the recently-proposed rules, the Fitch Ratings analysts Li Huang and Minyue Wang write, “We believe the proposed rules will further develop China’s MMF sector, with the tighter standards reducing system risk associated with MMFs.”
Evolving regulation around the globe is a key watch item.
Minyue Wang, Director, Fitch Ratings
The CSRC published its revised proposals in February 2023 and Fitch Rating’s verdict was that, “The regulators have modified several requirements in the final regulation from the draft version, but most changes are marginal and thus do not undermine the positive impact of a tightened supervisory framework for the sector.” The revisions allow for greater regulatory flexibility and also enhance the major funds’ ability to resist risk, which in turn will reduce the systemic risk of these funds.
As Shevlin already noted, these reforms may result in lower yields for RMB cash investors. He comments that the investment opportunities have already been muted in China because the country’s economic growth was relatively weak – especially when compared to other markets round the world – because of the Covid restrictions that were previously in place. Also, corporate profitability and inbound investments were reduced, while a dovish monetary policy also pushed short-tenor interest rates lower. “Having said that, China’s recent reopening has boosted investor sentiment, but as the interest rate is likely to stay low for the foreseeable future, the RMB money market fund and cash investment opportunities remain muted,” says Shevlin at J.P. Morgan Asset Management.
Despite the muted opportunities, there are still a number of funds that have been launched in recent months by international providers. For example, in August 2022, HSBC Asset Management launched its RMB global MMF, which caters to investors who need additional RMB liquidity. The fund’s strategy aims to preserve capital, provide daily liquidity and offer a competitive portfolio yield over the medium term that is comparable to RMB money market rates in the overnight to one-month tenor.
At the time of the launch, Catherine Tsang, Portfolio Manager, Liquidity at HSBC Asset Management said, “Mainland China’s monetary policy direction tends to differ from other parts of the world which suggests there is an inherent diversification benefit in Chinese assets.” And this policy divergence was noticeable when the US Federal Reserve started hiking rates while the Chinese central bank was easing its policy, she added.
Global bank Citi also announced a RMB product last year and in October 2022 said it was offering the first MMF distribution service to institutional clients in China, which was addressing multinationals’ needs for short-term instruments in the midst of volatility in the global markets. Danone, the Paris-headquartered food multinational, was the first to complete a transaction with the RMB-denominated fund, which is offered by a large asset management company Citi has worked with for years. At the time of that transaction, Melvin Lim, Vice President of Danone Business Services China, North Asia and Oceania, said: “Citi’s RMB Money Market Fund Distribution Program provides a convenient transaction channel of money market funds to enhance the return of surplus cash while maintaining liquidity.” The bank said at the time it plans to roll out more of such funds for its clients in China to meet their cash management needs.
Although there has been a more muted sentiment surrounding Chinese MMFs, the market is expected to grow in the years ahead. Fitch Ratings, for example, notes that the compound annual growth rate of the Chinese MMF market was around 16% to the end of June 2022. And the credit rating agency expects the market to grow even further because of its unrealised potential. In China, the Fitch analysts note, the proportion of MMFs to overall M2 money supply is much lower than in other markets. In China, MMFs are less than 5% of M2, while in the United States it is over 20%. Fitch identifies this metric as signalling the potential for greater expansion of assets under management in Chinese MMFs.
As the market adjusts to the changing dynamics, the needs of institutional investors in Asia’s MMFs are changing. Shevlin comments on broader trends and how their needs are evolving: “Cash investors are becoming increasingly sophisticated – the promise of just an attractive yield is no longer sufficient. The volatility and negative returns recorded by many investment products in 2022 has renewed focus on minimising downside risks. Meanwhile, segmenting cash across different investment strategies – including money market, ultra-short and short duration products – depending on the investment tenor remains important to maximise returns while ensuring good liquidity and security,” he says.
And aside from their increasingly sophisticated needs, investors are also asking more about environment, social and governance (ESG) issues. “ESG is an increasing focus for companies and boards,” he says, adding that the broader fund management industry is witnessing more and more European-domiciled funds complying with the ESG reporting requirements of Article 6, 8 and 9 that have been laid out by the Sustainable Finance Disclosure Regulation.
And in Asia, there is also an increasing focus on ESG issues. “Regionally, Hong Kong and Singapore have also introduced new climate focused regulations for mutual funds. Understanding these new rules, their impact on investing and whether they help corporate investors meet their ESG commitments will become progressively more important,” comments Shevlin.
Shevlin comments on other issues affecting MMFs that go beyond regulations, implementation of ESG considerations and a pivot to more sustainable investment options. “Money market fund managers are prioritising compliance with a mixture of new regulatory, client and internal rules – whether that is positive tilt, Article 8 or sustainability goals. Each adds to the complexity of credit analysis, fund management and monitoring – while having direct impact on liquidity and returns,” says Shevlin. “Nevertheless, as the market developments, investment needs and regulatory reform continue to evolve, corporate investors should not forget the core objective of cash investment and look for products that truly offer attractive yields, liquidity and security.”
