China’s move late last week to cut its lending rate and liberalise interest rates are forecast to dent the popularity of money-market funds, but not enough to prevent their dominance of mainland portfolios.
On November 21, the People’s Bank of China cut the one-year lending rate by 40 basis points to 5.6% and the one-year deposit rate by 25bp to 2.75%. Barclays expects two more 25bp cuts in the benchmark interest rate in the first half of next year, which would affect both lending and deposit rates.
The PBoC also allowed the deposit rate ceiling to rise from 1.1 times to 1.2 times the benchmark, allowing banks to pay as much as 3.3% on one-year deposits. It's the second time it has granted banks such flexibility since June 2012, signalling another small step towards liberalisation.
A further benchmark rate cut would lead to lower MMF yields, and further rate liberalisation would reduce the attractiveness of these funds as banks could offer higher deposit rates.
This would dent the popularity of MMFs in China, but not substantially, argued Bai Yan, an analyst at Howbuy Funds Research Centre, a Shanghai-based third-party sales platform.
He noted that MMF yields would decline, leading to a slowdown in MMF asset growth and a decline in market size. He said most MMFs invested in negotiated deposits and the interbank bond market, where yields have fallen since the rate cut.
But even with their yields falling, MMFs still provided higher returns than current accounts which can only pay a maximum 0.42% rate as of now, Bai observed. These funds are alternatives to current accounts as both offer high liquidity, he said. MMFs such as Yu’E Bao offer T+0 settlement.
Tianhong’s Yu’E Bao, the largest MMF in China with Rmb535 billion ($87.2billion), has seen its seven-day annualised yield fall to 4.047%, from 4.078% on November 21 and 4.248% on November 14. It now stands at its lowest level this year. The fund had 89.8% in negotiated deposits and 7.7% in fixed income as at September 30.
Moreover, Chinese one-year bond yields fell 8bp to 3.17%, their lowest levels this year.
In the third quarter Yu’E Bao saw its first fall in AUM since launch last year, with assets dropping 6.8% to Rmb535 billion. Bai said yields falling more would cause Yu’E Bao's asset size to fall also.
China has 152 MMFs with total AUM of Rmb1.77 trillion as at September 30, with the number of funds having doubled and assets having grown 261% year-on-year, according to the Asset Management Association of China. Yu’E bao accounts for 30% of those MMF assets. But growth has slowed since early this year from 95% quarter-on-quarter in Q1 to 11% in Q3.
MMFs’ popularity has brought a higher awareness of financial management to Chinese households, noted Bai. Hence investors were not likely to switch money from these funds into bank savings, he noted, but rather into bond funds and equity funds.
Li Yimei, chief marketing officer at China Asset Management which has Rmb150 billion in money-market assets, said she did not expect to see a significant reverse in the overall MMF growth trend.
As long as these funds offer yield of more than 3%, they will attract retail investors, Li noted, and will typically continue to return 3-4%. Part of the money in MMFs is idle cash that won’t be withdrawn in the short term, she added.