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.
Yu E Bao, managed by Tianhong Asset Management and sold online by Alibaba Group, offers an annualised return of 6.7 per cent, compared with the 3 per cent official one-year savings rate. Some funds are offering higher rates, with news portal Eastmoney.com  marketing a product that targets 10 per cent.
"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.
Premier Li Keqiang is letting the market decide bank lending rates after cheap loans fuelled industry overcapacity and allowed local government debt to surge to 17.9 trillion yuan as of June 30. That is up 67 per cent from the end of 2010.
The mainland started the trading of negotiable certificates of deposit last month while the Communist Party's third plenary session in November said it would grant the market a "decisive" role in allocating resources.
While lending rates have been liberalised, savings rates are still under state control, encouraging banks to market WMPs and trust funds that offer higher returns as well as higher risk.
Assets managed by the mainland's 67 trusts soared 60 per cent to US$1.67 trillion in the 12 months to September, dwarfing the scale of money-market funds.
The State Council has tightened control on shadow banking with rules targeting off-the-books loans and enforcement of current regulations.
While aggregate financing, the broadest measure of new credit, fell to 1.23 trillion yuan in December from 1.63 trillion yuan a year earlier, it held steady from November even as commercial bank loans slumped to 482.5 billion yuan from 624.6 billion yuan the previous month.
Money-market funds were safer because the industry was closely regulated when compared with shadow-banking, said Wang Bo, head of marketing at Fortune SG Fund Management.
Such funds' assets could exceed two trillion yuan by the end of this year if they drew 10 per cent of household demand deposits, Victor Wang, an analyst at Credit Suisse, wrote in a note.