Money market exchange-traded fund assets grew almost fivefold in the third quarter in China, while equity and balanced mutual funds saw big outflows, as investors heavily de-risked their portfolios.
The total AUM of the 10 MM ETFs listed across the Shanghai and Shenzhen exchanges grew to Rmb310 billion ($49 billion) from Rmb65 billion in the three months to the end of September.
Investors have been rushing into MM ETFs at “a pace unseen before in the global ETF industry”, said Simon Colvin, a London-based analyst at data and index provider Markit. He estimated a total of $37 billion of new inflows during the third quarter, far outstripping the $10.6 billion of flows into MM ETFs in developed markets during the 2008 financial crisis.
Equity market volatility and the continued suspension of the IPO window are two key reasons why investors have shifted money into such ETFs, Colvin said in a September research note.
In another indicator of investors’ flight to safety, the 197 MM funds on the market surged 52% in the third quarter to Rmb3.7 trillion from Rmb2.4 trillion, according to the Asset Management Association of China (Amac). In contrast, mainland equity and balanced funds overall suffered a 44% drop in AUM to Rmb2.3 trillion from Rmb4 trillion.
Shanghai-based Fortune SG Asset Management, which runs by far the biggest MM ETF, was perhaps the biggest beneficiary of these ‘risk-off’ moves. The joint venture between French fund house Lyxor and Shanghai-based Hwabao Trust saw its AUM more than double to Rmb258 billion from Rmb111 billion in the three months to end-September. It is now the seventh biggest Chinese mutual fund house, having ranked 21st on June 30.
The inflows were mostly contributed by its MM ETF, Fortune-SG Tianyi, which saw its assets more than quadruple to Rmb217 billion from Rmb50 billion during the third quarter. It is now the seventh largest ETF in the world, according to Markit.
This is another runaway success story comparable to that of Yu’E Bao, the Rmb604 billion ($95 billion) MM fund launched by e-commerce giant Alibaba and Tianhong Asset Management. However, Fortune SG’s MM ETF is largely (88%) held by institutions, while Yu’E Bao is 99% held by individuals, based on company filings as of June 30.
Of the 10 biggest holders of Fortune SG Tianyi’s MM fund, six are foreign institutions: Credit Suisse (HK), E Fund (HK), Merrill Lynch International, Haitong International, Taikang Asset Management (HK) and Citic Securities International Investment Management (HK). Between them they hold 14% of unit shares in the fund.
Similarly for the Rmb61 billion MM ETF managed by Beijing-based Yinhua Fund Management, seven of the top 10 holders are foreign institutions, with a combined 34% of unit shares.
Ivan Shi, Shanghai-based research director at consultancy Z-Ben Advisors, said MM ETFs are more attractive to equity investors amid market volatility – particularly foreign institutional investors, because they have a limited choice of tools for cash management of their onshore Chinese equity accounts.
Onshore equity investors can use the government bond repo market for cash management, but that option is not yet open to foreign investors under the qualified foreign institutional investor (QFII) cross-border investment scheme and its renminbi equivalent (RQFII).
Shi said these recent developments boded well for the long-term future and development of the MM ETF market, as it showed that institutional investors are comfortable with these instruments.
However, market participants point to the risk of a lot of money being withdrawn from MM ETFs when the equity market has stabilised and risk appetite returns.
Shi agreed that these products would be vulnerable to large withdrawals when the government bond repo market opens to QFII and RQFII investors. There has not been confirmation of when that will happen.