Assets under management at Chinese fund houses posted the fastest growth in Asia last year and accounted for the largest share of the overall regional pie, turbo-boosted by lucrative links to online payment platforms, AsianInvestor’s newest AI100 survey shows.

With regulatory pressures building, though, that growth rate may have now peaked, analysts warn. 

AUM in China expanded at a 15.9% clip in 2017 and accounted for 18.3% of all Asia-sourced AUM, compared with 17.3% in the previous year, our latest comprehensive survey of the industry shows.

China also boasted the region's top-three fastest-growing individual fund houses and six of the top-10. 

The largest-single Chinese fund house is Tianhong Asset Management, a mutual fund management firm based out in Beijing, with $282.5 billion in AUM. It had the second-highest AUM growth overall at 80.3%, pushing it up five spots to seventh in this year’s AI100 regional rankings.

The secret to Tianhong AM's success? The fact it is 51%-owned by Alibaba-affiliate, Ant Financial, is surely no accident. This is because the Yu’e Bao Money Market Fund, which is directly linked to Ant Financial's Alipay online payment platform, is the colossus behind the company's AUM growth.

The beauty of that direct link to the ubiquitous Alipay is that investors can redeem their funds at any time for payment or to access cash --  a level of service and liquidity that other money market funds may find difficult to match. 

“For many people, Yu’e Bao is not only for cash management but also for lifestyle,” Niki Wu, a research manager and analyst at Morningstar China, told AsianInvestor.

That marriage of convenience also helps to explain why the Yu’e Bao fund is the largest money market fund in the world, with an AUM of $233 billion as of September 2017, according to a December report by Fitch Ratings, accounting for about 82% of Tianhong’s total AUM.

In the first two quarters of 2017, Yu’e Bao grew by 41% and 26%, respectively, data from Morningstar shows, as Chinese investors seeking higher returns shifted towards money market funds generally. 

“All money market funds expanded very fast in 2017, especially in the first two quarters,” Wu said, adding that pure bond funds in China had a 2.3% average return for the year, while money market funds returned 3.8% on average, helping to reinforce the trend by attracting more investors.

Volatility in the Chinese stock market was also a concern for Chinese investors, Tan Yunfei, fund manager for HFT Investment Management’s money market fund, said. “As a low-risk, high-liquidity asset, money market funds can meet investor expectations and are favoured by many investors,” Tan told AsianInvestor.

Even among money market funds, however, the Yu’e Bao fund stood out with an AUM growth rate of about 90% in 2017, compared with the average growth rate of 16% among other money market funds in China, Morningstar data shows. 

REGULATORY PRESSURE

That said, it could prove difficult for Yu’e Bao, and Tianhong by extension, to sustain the level of growth it experienced in 2017.

Yu’e Bao’s AUM growth rate slowed to 9% and 1% in the third and fourth quarters of 2017, respectively, according to Morningstar data, after it implemented a series of investment limits in May, August, and December that capped maximum investments at Rmb100,000 ($15,880) per account, and daily investments at Rmb20,000.

These capping measures can be traced back to regulatory policies aimed at controlling the growth and stability of money market funds.

In October 2017, the China Securities Regulatory Commission implemented new rules that raised liquidity requirements for money market funds the more concentrated the number of investors in that fund. Funds were also prohibited from having more than 10% of their assets actively invested in illiquid assets, down from a previous threshold of 30%.

These new rules on liquidity management and liquidity risk management will have a negative impact on Yu’e Bao’s AUM growth. “It’s not likely for Yu’e Bao to expand very fast this year,” Wu said.

The impact will be felt throughout the Chinese money market fund industry and not just at Yu’e Bao, HFT’s Tan said.

Banking supervision has tightened, the issuance of interbank certificates of deposit is expected to shrink, and the investable assets of money funds have also declined, Tan said, and he is not optimistic about the upcoming year.

“It is expected that the yield and size of money market funds will both fall from high levels in 2018,” he told AsianInvestor.

Tianhong Asset Management declined to comment on its AUM growth in 2017.

The complete list of the top 100 asset managers in Asia Pacific will be released in the April/May issue of AsianInvestor magazine.