Bumps in the road

Category: Asia, China
By Derek Au

China’s IMMF market continues to grow despite recent setbacks

This year, the spotlight of China’s asset management industry has been thrown over internet money market funds (IMMFs), which have been proliferating due to the extraordinary growth of Tianhong’s Zenglibao.

The product is offered by Yu’e Bao, a fund management platform owned by ecommerce giant Alibaba Group, and has been drawing huge interest from retail investors as it is easily accessible online.

According to Tianhong, as of the end of June, Yu’e Bao’s AUM reached more than 574.2 billion RMB (US$92.5 billion), the fourth-largest sum globally among money market funds. Its base of customers has now exceeded 100 million.

Asset managers attributed the fund’s explosive growth to its penetration into Mainland retail customers. Kheng Leong Cheah, head of sales, global liquidity, Greater China at JPMorgan Chase Bank (China), tells Asia Asset Management that Zenglibao has capitalised on Alibaba’s broad network of online customers.

“I think the popularity of something like Alibaba’s money [market] fund is because of the easy access for retail investors, coupled with its lower threshold. Investors have already had existing online accounts with them, so with that they can easily invest in money funds at their fingertips. As such, the convenience of approaching and investing in money funds has given rise to this popularity,” he explains.

Despite its prevalence, there is a chance the allure of Zenglibao may suffer due to a recent nosedive in yield. Payments spiked at above 6.7% earlier this year, before slipping to below 4.2% in July. Lily Liao, a Morningstar China fund analyst, says relatively loose liquidity in the market is to blame for the dip in yield.

“I believe the fall in its yield is mainly linked with the market rate. Its yield dropped as the overall market rate went down on the back of the central bank’s two cuts in [the] targeted reserve requirement ratio this year.” She adds that the fund’s yield is vulnerable to a fall in market rates, given its huge exposure to bank deposits.

Nevertheless, Ms. Liao believes the fund’s popularity will not be pummelled too heavily by the downtrend in yield, which is still far above retail banks’ current deposit rates. What she believes could be a major blow to the fund, however, is a turnaround in the fortunes of China A-shares. She expects investors will switch to equities from IMMFs in the hunt for higher returns when the upturn arrives, as has happened in prior bull markets.

One rating agency has also expressed concerns over the outlook for Chinese IMMFs. Fitch Ratings expects that the ongoing process of interest rate liberalisation by Chinese policymakers, which is expected to result in a lift on the current cap on deposit rates, could drag on the growth of Chinese IMMFs. “In the longer term, the authorities’ gradual approach to liberalising the quasi-fixed deposit rate regime will also have an impact on AUM trends, potentially slowing growth rates in the retail segment if bank deposits become more competitive with IMMF returns. In contrast, institutional investors will probably continue to value the diversification offered by IMMFs,” the rating agency said in a statement earlier this year.

Fitch’s alarm came just as the Chinese IMMF market was experiencing impressive growth. According to a recent report from the Investment Company Institute (ICI), a trade group for fund managers, the AUM of China’s IMMFs overall stands at US$234.5 billion, up 180.7% year-on-year.

JPMorgan’s Mr. Cheah believes the growth of Chinese IMMFs will inevitably slow down as a result of a higher base. “I think if you look at the absolute growth rate, it is going to moderate in the future. It is just like when the market is getting bigger; the growth rate will naturally come down. However, the magnitude of growth would still be huge,” he says. He expects more regulations will be put in place amid continuous growth of the IMMF market, which could cause uncertainties in the industry.

Nevertheless, Mr. Cheah believes there is still plenty of room for the Chinese IMMF market to grow, given that its development is still at a nascent stage. “If you look at the number of money [market] funds available in China, it is still very limited. There are thousands of money funds in the US, whereas it is estimated to be a hundred money funds in China. In other words, there is great growth potential for this kind of investment tool in institutional and retail spaces,” he claims, adding that he expects other Chinese IMMF distributors to mimic Alibaba’s strategy, resulting in more new sales channels, which could further invigorate the industry.