Financial regulation

China tightens supervision of money market funds by capping same-day redemption at US$1,560

PUBLISHED : Saturday, 02 June, 2018, 11:33am
UPDATED : Saturday, 02 June, 2018, 11:33am

China has strengthened oversight of the nation’s fast-growing US$1.2 trillion money market funds sector, capping instant same-day redemption at 10,000 yuan (US$1,560) from a single fund and banning payment companies from allowing investors to foot their bills with such funds directly.

Mainland’s money market funds have experienced problematic practices with regard to internet sales and redemption, harming the interests of investors and detrimental to fair play in the market, the People’s Bank of China, the nation’s central bank, and the top securities regulator, the China Securities Regulatory Commission, said in joint statement after issuing the new rules on Friday.

The rules take effect immediately.

The regulators said that some fund managers were “blindly” expanding their businesses by touting investors with “real-time, large sum redemptions” while noting that some payment companies were paying the redemption with their own cash in advance, creating liquidity crunch risks.

Such irregularities could “trigger liquidity risks in extreme market conditions, and threatens to cause systemic risks and are in need of regulation,” the statement said.

The new rules cap instant redemptions, which means investors can only withdraw 10,000 yuan from a single money market fund in one day. There is no daily limit on overnight redemptions however.

In addition, authorities have banned payment companies to pay with their own cash in advance to realise a “de facto” same-day redemption to lure investors.

Money market funds compete with banks for deposits, and they invest in money market instruments including financial bonds, treasuries, corporate bills and interbank deposits.

The practice of so called “value-added services” by paying with funds directly for bills has also been prohibited.

The rules stopped short of naming any companies involved in such practices.

Yu’e Bao, the cash management services arm of Ant Financial is the dominant player in China’s money fund market, which in turn is an affiliate of e-commerce giant Alibaba Group Holding.

Yu’e Bao, integrated with Ant Financial’s popular payment app Alipay, saw its net assets surge to 1.69 trillion yuan in the first quarter, up 40 per cent from a year ago.

It was Ant Financial that created the idea of easy and low-threshold access to money market funds with small pocket money in Alipay that accelerated the popularity of such funds among grass roots retail investors back in 2013.

Although the rules take effect immediately, the authorities have also granted market players a one-month grace period to tweak their existing business model to comply with the new limit on same-day redemption.

Payment companies meanwhile have been offered a six-month grace period to adjust their practice of paying investors in advance with their own money to realise a “de facto” same-day redemption.

Alibaba owns the South China Morning Post.