Fears continue to rise about the concentration of risk in China's swelling money-market funds, as they increasingly dominate the country's mutual fund landscape.

Tianhong Asset Management extended its lead as the biggest mutual fund house in China in the first half of 2017, thanks to a dramatic 80% increase in assets at Yu’e Bao, its money market fund (MMF).

Yu’e Bao now accounts for 28% of China MMF AUM, with the next two biggest – both ICBC Credit Suisse products – accounting for 7% between them.

Tianhong's assets under management (AUM) totalled Rmb1.5 trillion as of June 30 for a 15% share of the Rmb5.1 trillion ($752 billion) mutual fund market, compared with 9.22% at the end of 2016.

Yu’e Bao makes up 90% of Tianhong's AUM. It is now the world's biggest MMF, having surpassed the JP Morgan US Government MMF in the first quarter of this year.

MMFs as a whole now contribute 51% of all mainland mutual fund assets, according to the Asset Management Association of China.

Concentration concerns

The high concentration in MMFs is cause of worry for some analysts. That's because large or sudden asset re-allocations by the bigger funds could affect market liquidity or pricing dynamics, Fitch Ratings said in a report on July 11.

MMFs began growing rapidly in China from the second half of 2013 thanks to strong retail demand, not least via Yu’e Bao. Institutional investor demand drove a second wave of development in the second half of 2015, as stock markets turned volatile and banks sought to outsource some of their cash management, said Huang Li, co-author of the Fitch report.

Where the MMF industry goes from here is difficult to predict because the sector is closely related to the wider capital market environment, she told AsianInvestor.

On the one hand, Chinese MMFs have plenty of room to grow over the long term because the ratio of MMF assets to broader money (M2) in China significantly lags that in the US and Europe. As of March 31, the ratio of MMF assets to M2 in China was about 3%, compared with 12% in Europe and 22% in the US, Fitch estimated.

On the other hand, MMF growth could be reined in if the mix of Chinese mutual fund allocations normalises to a level more in line with that of other countries, meaning other fund classes would need to grow at the expense of MMFs, Fitch said.

It appears that regulators are looking to dampen the rapid growth of MMFs. Yu’e Bao has been forced to cut its Rmb1 million ($145,000) investment cap to Rmb250,000 since late May. This will make it less suitable for big institutions going forward, Fitch’s Huang said.

In addition, the China Securities Regulatory Commission (CSRC) began consulting in March on strengthening the rules for the liquidity management of MMFs, particularly institutional MMFs with concentrated investor bases. This could potentially dampen future flows to MMFs, said the Fitch report.

Institutional vs retail

There are notable differences between MMFs, not least in terms of the composition of their clients. While Yu’e Bao is 99% retail, about 60% of all Chinese MMF assets as of end-2016 were institutional, Fitch data shows.

That difference in institutional concentration can lead to differences in liquidity risk management. A liquidity crunch in the fourth quarter last year, for example, sparked huge redemptions from mainland Chinese MMFs. The country's biggest exchange-traded MMF – Fortune SG Tianyi MMF – saw Rmb5.6 billion of outflows on December 20 alone.

Institutionally held MMFs were the worst hit, Fitch’s Huang said.

In comparison, Yu’e Bao, with some 320 million individual investors, was less affected. Such a diversified investor base makes big sudden outflows less likely, the Fitch report said, but big redemptions may still arise in extreme circumstances, when retail investors tend to act in herds.

Asked how it addressed such concerns, Tianhong told AsianInvestor by email that it identified three key factors when it comes to MMF management: liquidity, return and risk. But the three factors cannot be optimised at the same time, the firm said, so it calls them the “impossible triangle”.

Hence, in practice Tianhong makes liquidity management its first priority and tries to achieve a “reasonable level” of returns with exposure to risks that are controllable.