Manager of World's Biggest Money Market Fund Reports Strong First Half

The fund manager of China’s Yu’e Bao reported stellar growth of first-half earnings despite the government’s tighter oversight of the country’s ballooning money market fund industry.

Tianhong Asset Management Co., which manages the $215-billion money market fund built on spare change from online spending, had a net profit of 1.10 billion yuan ($165 million) for the first six months of 2017, according to Jun Zheng Group that owns 15.6% of Tianhong.

It was an increase of 87% from 584.8 million yuan a year ago, Jun Zheng said in the regulatory filings to the Shanghai Stock Exchange.

Revenue during the period rose 49% to 4.01 billion yuan from 2.70 billion a year earlier, Jun Zheng added.

Yu’e Bao represents nearly 95% of assets managed by Tianhong Asset, which is majority-owned by Ant Financial Services Group. The fund in April overtook JPMorgan Chase & Co.’s U.S. government money market fund of $150 billion as the world’s largest money market fund.

The Chinese government has issued tighter rules and repeatedly called for restraint of the runaway growth of the money market fund industry, which is now the world’s second-largest after the U.S. However, the industry continues expanding as investors are hungry for yields, while some are shifting back from tightly regulated, much-riskier wealth management products.

In fact, inflows to China’s money market funds in July reached 751.6 billion yuan, 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.

Founded in 2013, Yu’e Bao, which in Mandarin means “leftover treasure,” has ballooned in size as millions of users migrate to its affiliated online-payment application, Alipay. Most Alipay users transfer payments and refunds from online transactions into Yu’e Bao to earn interests as high as 3.9% — much better than returns from bank deposits and many other investments.

Yu’e Bao has been reining in its expansion by reducing the maximum individual contribution of new investors by 90% in just three months to 100,000 yuan ($15,000). Market watchers believe the fund is under pressure from the regulator to slim down.

In March, the China Securities Regulatory Commission issued rules to curb risks of open-end securities products like Yu’e Bao. The regulator now requires all money market fund managers to set aside no less than 0.5% of its net assets as cash reserves to serve as a buffer against potential bad debts.

As the fund snowballs, the March rule means Yu’e Bao must take out about 7.15 billion yuan as its cash buffer. However, the management fees roughly stand at 0.03% of the fund’s worth, or 4.29 billion yuan, leaving a shortfall of nearly 3 trillion yuan, which motivates Yu’e Bao to take in less cash.

Over 82% of the funds in Yu’e Bao are in the form of bank deposits and reserves, with the rest in short-term investments, policy bank bonds, company bonds and interbank deposits, according to the second-quarter report by Tianhong on the fund’s operation.

Contact reporter Aries Poon (ariespoon@caixin.com)