Warning sounded on failures linked to cash crunches

A doubling in the mainland's money-market funds in the past six months is draining bank deposits and raising the risk of financial failures during cash crunches, Fitch Ratings warns.

The assets under management of such plans surged to a record 737 billion yuan (HK$937 billion) on December 31 from 304 billion yuan on June 30, said Roger Schneider, senior director at Fitch's Fund and Asset Manager Rating Group.

"Clearly, yields of 8-10 per cent are not sustainable," Schneider said.

"They will definitely come with the risk, and the premium includes both credit risk and liquidity risk in what they buy. There are strong refinancing needs among corporate issuers this year and the credit profile is to some extent deteriorating."

Funds investing in interbank deposits and short-term corporate paper have benefited from record money-market costs as the central bank engineered a cash crunch to stop excessive lending. Banks are selling more wealth-management products (WMPs) to stem the savings exodus, swelling the shadow banking industry. Industrial and Commercial Bank of China last week rejected calls to bail out a three billion yuan trust product it marketed to savers seeking high returns.

The benchmark seven-day repurchase rate jumped to a record 10.77 per cent on June 20 and averaged 4.09 per cent last year, from 3.5 per cent in the previous year. The similar US dollar rate is 0.07 per cent. Interbank deposit rates rose to 10 per cent last month, and have stayed above 6 per cent this month, according to Fortune SG Fund Management.