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Is China’s money-market fund healthy as it surges?

Xinhua Financein CFBOND
2018-10-10 16:03

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The market was expecting that China’s money-market funds, which have experienced a feverish growth, would shrink gradually as the country’s regulators tightened supervisions. But things seem to go the other way around.
 
Latest data shows that China’s money-market funds have been skyrocketing in recent months, with its value up hundreds of billions of yuan each month. As of the end of August, the country’s money-market funds expanded to a total value of almost 9 trillion yuan.
 
China’s money-market funds surged 2.2 trillion yuan in half a year
 
China’s money-market funds expanded wildly in 2017, with its size almost doubling from nearly 3.6 trillion yuan at the beginning of the year to nearly 7 trillion yuan. As the momentum continued in 2018, the funds expanded to nearly 8 trillion yuan at the end of February.
 
The regulators have taken various moves to prevent liquidity risks brought by the fast-growing money-market funds. On the one hand, the regulators issued new regulations on liquidity, and refined regulations on the duration of money-market funds, the types of investment, and the concentration of investment. Since then, various restrictions have been imposed on the purchase and redemption of money-market funds. On the other hand, the Asset Management Association of China (AMAC) convened a fund evaluation business symposium.
 
The mix of regulatory measures takes immediate effects. Data from AMAC shows that the scale of money-market funds dropped dramatically by nearly 490 billion yuan and 580 billion yuan in March and June of 2018, respectively.
 
However, just as the market is expecting that the size of money-market funds would show a downtrend in the future, it goes the other way around. Latest data shows that China’s money-market funds have been skyrocketing in recent months, with its value up hundreds of billions of yuan each month. As of the end of August, the total scale reached a new high, approaching 9 trillion yuan. This figure has increased by more than 2.2 trillion yuan compared with 6.73 trillion yuan at the beginning of the year.
 
As of the end of August, the total size of public funds has only increased by about 2.5 trillion yuan during the year. It can be seen that the money-market fund is still the main driver of the large increase in the scale of public funds, and the imbalance of fund structure remains.
 
On the surface, it makes no sense that the scale of money-market funds expands as the regulations tightened. But the deeper reason is that the market has undergone new changes. The fund managers interviewed believe that there are two main reasons behind this anomaly. First, monetary policy has maintained reasonably sample liquidity while being stable and neutral. Secondly, as investment channels have narrowed, a large amount of funds are seeking for haven.
 
A fixed-income manager believes that after the surge in money-market funds, the regulators obviously intend to control its size to prevent liquidity risks and systemic financial risks. However, there are new changes this year. As the economy is facing downward pressure, the central bank cut required reserve ratio several times to inject liquidity and support the development of the real economy. Based on this logic, it is easy to understand why the size of the money-market funds has increased dramatically.
 
Rules are more important than scale as risk exposure declines.

Another doubt in the market is that as the size of money-market funds continues to expand, how to deal with potential risks behind it? Shanghai Securities News reporter learned that although the scale of money-market funds is far greater than that at the beginning of the year, the internal structure of money-market funds has undergone major adjustments, and the risk has been greatly reduced.

Although money-market funds are far superior to bank deposits in terms of liquidity and yields, it is undeniable that money-market funds face huge risks. Based on overseas experience, once the liquidity crisis in money-market funds broke out, it had a great impact on the entire financial market.
 
A fixed-income fund manager in Shanghai told reporters that China's new liquidity rules have been in operation for some time since it was released last year. Money-market funds rectified according to the new rules. More importantly, the new liquidity rules have refined the previous rules. "According to what we have learned so far, this new liquidity rules have comprehensively adjusted the structure of money-market funds, which are now very conservative in credit to duration, to leverage. The overall liquidity risk of the cargo base has been greatly reduced, and the scale is not so critical."

Translated by Coral Zhong
 
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