Caixin
Dec 22, 2016 07:14 PM
FINANCE

Money Market Funds Shrink as Big Players Have Change of Heart

(Beijing) — The combined size of money market funds in China shrank for the third month in a row in November and is expected to fall further in December as investors seek higher yields and lower risk in what has become a volatile market.

The total net asset value of money market funds in China stood at 3.9 trillion yuan ($561 billion) at the end of November, down about 269 billion yuan from the previous month, according to data released Wednesday by the Asset Management Association, a government-backed industry group.

The decline was sharper than the month-on-month changes in October and September, which were 254.6 billion and 98.3 billion yuan respectively, according to the association.

Toward the end of a year, the size of money market funds will often increase as companies secure short-term funds to bump up their ranking, which can help sales in the next year. This year, however, most funds are struggling just to “shrink less than others," said a sales person at a mutual fund company.

Fund managers are facing unusually strong pressure from withdrawals by institutional investors such as banks, which are reallocating their investments to other fields to avoid risk and pursue higher yields, analysts said.

Money market funds invest primarily in interbank loans and low-risk bonds, which usually generate safe, albeit low, returns. Over the past few weeks, however, the bond market has seen prices tumble partly because the central bank tightened the supply of short-term, cheap funds to discourage traders from borrowing excessively to buy securities.

It has also become more expensive to borrow from other financial institutions in the interbank market, which means making the loans has become more lucrative.

Companies sensitive to the change have been pulling out of low-yield money market funds and reinvesting the money into new products that offer better returns. This could set in motion a vicious circle, according to some analysts. Fund managers need to sell more bonds to meet these unusually large withdrawal demands, and the sales drive down the value of bonds they still hold, which in turn makes other investors want to withdraw their cash.

Fears of incurring this vicious circle were the reason why most companies chose not to announce big withdrawals from their funds even though they are required by regulators to do so, an executive of a fund company said.

“If banks make big withdrawal requests, it'd be forcing the fund company to dump bonds, adding to the market volatility," said Liu Gangling, an assets management executive at the Bank of Tianjin.

Contact reporter Wang Yuqian (yuqianwang@caixin.com)

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