China Money Market Funds Grow Strongly in July

China’s money market funds (MMFs) expanded sharply in July, as investors showed they were hungry for yields while some shifted back from tightly regulated, much-riskier wealth management products.

In July, MMFs in China drew in 751.6 billion yuan ($112.8 billion) of fresh funds, according to data from the Asset Management Association of China. It was a big increase, given that net inflows during the first six months totaled 821.6 billion yuan, the association said.

China is the world’s second-largest MMF market after the U.S.

MMFs invest in bank deposits, as well as short-term and highly rated securities such as government debts and banks’ certificates of deposit. But unlike in the U.S., where those funds are not allowed to be leveraged, Chinese MMFs can increase its scale of investment via debt financing, a situation that has concerned regulators.

As of the end of June, debt taken on by MMFs on average was about 1.043 times that of the fund’s own assets, the association said. It was up slightly from 1.034 times as of the end of March. An industry executive said the level of 1.1 times is a widely accepted ceiling for Chinese MMFs.

Analysts have also said MMFs can amplify risks within a financial system, as happened in the U.S. and Europe during the financial crisis late last decade. The Chinese government has also repeatedly called for restraint of the runaway growth of the market. Yu’e Bao, Ant Financial Service Group’s money market fund, earlier this month lowered the maximum contribution from new investors, hoping to slow the fund’s expansion — a move that some analysts believe came under government pressure to curb the fund’s growth.

The investor base of Chinese MMFs has grown exponentially in recent years, in part thanks to the stellar rise of Yu’e Bao, which was built on spare change from Ant Financial’s online spending platform, Alipay. Yu’e Bao is now the world’s largest MMF, with $215 billion assets under management.

In addition, the government has been stepping up efforts to clamp down on unconventional and off-balance-sheet funding channels, as part of the national campaign to slim down the credit-fueled economy. Wealth management products, usually sold by financial institutions, are one of the bigger targets due to the hidden risks such products entail.

China International Capital Corp. said in a recent note that more money flocked to short-term investment products during the second quarter, as other products such as equities and wealth management products no longer offer attractive returns amid the national campaign of financial deleveraging.

As of the end of June, the average returns of MMFs rose 40 basis points to 3.75% from the end of the first quarter, which also helped boost the scale of the sector, the brokerage added.

The average seven-day return for Yu’e Bao, for instance, was at an annualized 4.07% on Wednesday compared with 3.89% at the end of March, data from its manager’s website show.

Comparing with the fast growth of MMFs, inflows into other categories showed declines. Total assets of the country’s equity funds dropped 1.16% a month to 718.1 billion yuan in July, while hybrid funds, whose portfolio is a mix of stocks and bonds, decreased by 7.28% on month to 1.86 trillion yuan by June.

Contact reporter Leng Cheng (chengleng@caixin.com)