China money market funds find new appeal after stocks rout

Remember Alibaba Group Holding's retail money market fund that gave China's banks and their deposits a start in mid-2013?

Not long after launching, the fund, Yu E Bao, was paying an annual yield of more than 6 per cent for investments as small as 1 yuan, a breakthrough for retail depositors in a market where banks had paid them a low, government-capped rate for decades. The fund drew in 185 billion yuan within six months.

Two years on, this has all changed. Last week, the yield on Yu E Bao fell below 3 per cent, a new low in a long downward trajectory this year that has drawn the returns from the fund ever closer to the rate paid out on bank deposits.

Yu E Bao's seven-day annualised return hit 2.958 per cent on Thursday, down from a high of 6.76 per cent in January last year.

Large banks in China pay 2.25 per cent annual return on demand deposits. The real returns are much lower, or about 0.25 per cent, with inflation shaving off two percentage points in August.

Yields on retail money market funds have been falling for most of this year as the central bank pumps liquidity into the market. Declining returns led experts to predict stagnant growth for those businesses.

Yet, despite the unattractiveness of the yield and against some predictions six months ago, money market funds refuse to be passed over. In fact, in the wake of a more than 40 per cent crash in the stock market, funds such as Yu E Bao continue to grow, albeit much more slowly than before.

In the first nine months of the year, money market assets under management grew more than 13 per cent to 2.49 trillion yuan.

The cash that was pouring into the equities market up until its peak on June 12 is now looking for safety.

"Investors have become more risk-averse since the stock market crash," said Li Huang, an associate director on Fitch Ratings' fund and asset management team in Shanghai.

"In the short term, we expect investors to continue looking for havens but we don't expect money market funds to see the same growth as in 2014."

Money market funds became a substantial player in Chinese finance in the second half of 2013, when high interbank rates fanned fears of a liquidity crunch. By the first half of last year, the investment products were enjoying explosive growth and a new recognition as a viable place to put cash.

Last year, assets under management at money market funds grew nearly 150 per cent to hit 2.2 trillion yuan, according to data from Wind.

The growth was primarily driven by retail investors switching into online funds such as Yu E Bao.

Before Alibaba launched the fund, which is managed by Tianhong Asset Management, money market funds were largely not accessible to retail investors on online platforms.

The flow of cash into these products began to dwindle in the second half of last year as the rally in stocks gathered steam. But the ensuing crash has kept money market funds growing this year.