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June 2021
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Fitch sees China fund market become less skewed to MMFs

Fitch
By Hui Ching-hoo   
June 11, 2021

China’s mutual fund market, which is currently dominated by money market funds (MMFs), is expected to become less concentrated as regulators clamp down the funds, according to Fitch Ratings.

MMFs represent the biggest share of China’s mutual fund market, accounting for almost half of the total assets. These funds have dominated the market since Chinese technology mogul Jack Ma’s Ant Group launched its first MMF, Yu’e Bao, in 2013.

Yu’e Bao, which is linked to Alipay, one of the largest mobile payment platforms in China, has since become the country’s largest MMF.

But increased regulation has resulted in Yu’e Bao’s assets declining in recent years to currently stand at 972 billion RMB (US$151.6 billion), dipping below the 1 trillion RMB mark for the first time since 2017, says Alastair Sewell, senior director of fund and asset managers at Fitch.

This April, Beijing asked Ant Group to trim the size of Yu’e Bao because of the significant liquidity risk.Regulators did not specify a cap, or whether they were waiting for Ant to do it voluntarily.

“The recent Chinese authorities’ requirement for Yu’e Bao to reduce its size may be a sign of increased regulatory involvement in China’s fast-growing investment management sector,” Sewell said at a June 8 webinar for reporters organised by the ratings agency.

Beijing has also imposed other general measures on MMFs in recent years, including liquidity management rules in 2017 requiring the funds’ managers to maintain shorter portfolio durations and more liquid assets in order to address concentration risk.

As a result of these measures, the share of MMFs in China’s mutual fund market declined from over 60% in 2018 to 46% as of December 2020, according to Li Huang, associate director of fund and asset managers at Fitch.

But she said the share is still very high compared to the West, and it’s largely because MMF growth in China has been driven by retail demand. MMFs account for just 8% of the mutual fund market in Europe, and 15% in the US.

Moreover, she noted that Chinese regulators allow MMFs to leverage up to 20% of assets, whereas European and US regulators forbid leverage.

Huang said the absolute value of MMFs may continue to increase as investors allocate more to the funds amid market volatility in China. But the MMFs’ overall share of the mutual fund market is likely to decline further.

“Fitch expects Chinese MMFs to further grow in a less concentrated market and strengthened regulatory environment,” Huang said.

China’s mutual fund market is the fifth largest in the world, with $2.7 trillion of assets as of end-2020, according to figures from Fitch Ratings.