Regulators Crack Down on Same-Day Money Market Fund Redemptions

Chinese regulators have set a limit on the size of same-day money market funds redemptions, the latest move to control risks in the rapidly growing industry.

Investors may now withdraw no more than 10,000 yuan ($1,558) from a money market fund on the same day they make the redemption request, according to a joint statement on Friday by the China Securities Regulatory Commission (CSRC) and the People’s Bank of China.

“Some fund managers and fund sales agencies have blindly expanded their businesses by promoting ‘instant large-sum withdrawals,’ while some payment institutions have violated regulations on providing funding advances, creating a (false) sense of unlimited liquidity among investors,” a CSRC spokesperson said Friday.

A waiting period to withdraw funds has been one of the key distinctions between a money market account and a bank deposit account, which offers lower returns for a lower risk investment. Prior to 2013, when Ant Financial’s Yu’e Bao money market fund began allowing investors to withdraw money at any time, investors typically had to wait two days before a redemption.

The new rules also prohibit individuals and institutions other than commercial banks from providing advances ahead of redemptions. The rules are effective immediately, but companies have been given a one-month transitional period to comply with the new same-day redemption limit.

Total money market fund assets stood at 7.81 trillion yuan at the end of March, more than double the level of a year earlier, accounting for 63% of Chinese mutual fund market assets, according to data from the Asset Management Association of China.

The key to controlling the growth of money market funds in the longer run is not putting limits on money market fund businesses, but rather ending the dual-track interest rate system by bringing deposit and market interest rates onto the same track, said Chen Jianheng, a fixed income analyst at China International Capital Corporation. This can reduce the market’s demand for money market funds, he said.

China’s central bank still manages deposit rates through informal guidance.

Caixin reported earlier that the central bank and securities regulators are drafting rules that would give investors a clearer picture of how money market investments are performing on any given day.

Contact reporter Liu Xiao (liuxiao@caixin.com)