Most Mutual Funds Look Insulated From Bank Taken Over By Regulators

Two of eight mutual funds contacted by Caixin hold assets in a bank recently taken over by regulators, according to employees at each of the funds, suggesting that the industry’s exposure to the lender may be limited.

Mutual funds have been hesitant to hold Baoshang Bank Co. Ltd.’s assets due to its links with Tomorrow Holding, the conglomerate controlled by tycoon Xiao Jianhua, who is reportedly under investigation for graft, according to interviews with employees.

The two mutual funds holding Baoshang Bank assets did not reveal how much they had invested.

On Friday, the People’s Bank of China and the China Banking and Insurance Regulatory Commission took over Baoshang Bank for one year, citing “severe credit risk.” It was the first time that a private lender in China had been directly taken over by authorities in 20 years. In a statement on Sunday, the regulators announced that all of Baoshang’s corporate deposits and interbank debts of up to 50 million yuan would be guaranteed.

Caixin later learned that the regulators will guarantee at least 70% of the interbank debts of over 50 million yuan ($7.25 million) and 80% of corporate deposits above that amount.

Money market funds also face limited exposure to the bank because regulations restrict how much they can invest in assets from institutions with anything less than a “AAA” credit rating. Baoshang Bank was rated “AA+”.

China’s securities regulator stipulates that financial instruments issued by institutions with less than a “AAA” rating must not exceed 10% of a money market fund’s net asset value, according to regulations (link in Chinese) that took effect in October 2017. In addition, instruments issued by a single such institution cannot account for more than 2% of a fund’s net asset value.

Still, some mutual funds might need to take emergency measures if any of their products contain a significant amount of Baoshang Bank’s assets, said the head of the fixed-income department at a major mutual fund. Some money market funds still hold Baoshang Bank’s negotiable certificates of deposit (NCD) — a popular interbank lending tool — Caixin has learned. “There might be companies with poor internal risk controls that hold Baoshang Bank’s NCDs or have deposits at the bank,” the fixed-income department head said. “They might start feeling the pain now.”

Contact reporter Timmy Shen (hongmingshen@caixin.com)