The Chinese money market interest rate landscape has rotated substantially in 2021 as investors grappled with the implications of slower economic growth and the reluctant, yet swift, monetary policy pivot of the People’s Bank of China (PBoC). Concurrently, money market funds (MMFs) witnessed strong inflows, despite increased competition from new products.
In 2022, we anticipate that lower interest rates, a focus on climate change and the implications of looming asset management product rule changes will create challenges and opportunities for Chinese MMFs.
Interest rate pivot
From robust growth at the start of 2021, multiple factors negatively impacted the Chinese economy. The government’s commitment to deleveraging the property and shadow banking sectors, combined with new variant outbreaks, all magnified economic volatility and prompted expectations of fiscal and monetary policy easing.
Initially, the hawkish comments by the PBoC pushed Shanghai interbank offered rate (Shibor) yields to year-to-date peaks in February. However, by mid-year, the PBoC pivoted to neutral and then most recently a dovish policy stance, cutting the reserve requirement ratio twice, on both occasions it was foreshadowed by calls from Premier Li for monetary support for the real economy.
Anticipating these cuts, Shibor yields declined and the curve flattened throughout the remainder of 2021. The PBoC also focused on maintaining adequate liquidity by keeping the repo rates much more stable than in 2020. However, escalating property-related credit risks continued to negatively impact onshore credit spreads, which surged higher in the second half of 2021.
MMFs with long duration positions outperformed during 2021, but heightened expectations of additional upcoming monetary policy rate cuts have diminished the longer-term outlook for MMF yields. Given their focus on high quality investments, MMFs, especially triple-A rated funds, remained insulated from higher credit risks – although credit markets are likely to remain volatile in 2022.
Evolving asset management industry
Mutual fund assets under management (AUM) jumped to a new record high of 24 trillion yuan (US$3.78 trillion), up 34% year on year (yoy), as at Q3 2021. While this was impressive, mutual funds still only represent 10% of the total bank deposits base (approximately 230 trillion yuan), although they have caught up on bank wealth management products (approximately 27 trillion yuan).
In absolute terms, the biggest increase was in MMFs, which jumped 29% yoy to a new record high of 9.4 trillion yuan, a strong rebound following declines in 2019 and 2020. MMFs still represent the largest asset class with 39% of total AUM, although this has continued to trend downwards from a peak of 67% in Q3 2018 as other asset classes have grown faster.
MMFs utilized by e-wallets continued to dominate, representing 49% of total MMF AUM, interestingly these are now more diversified as regulatory concerns translated into more fund choices for retail investors across the e-wallet platforms. Institutional demand also remained strong, representing 38% of AUM; although the number of triple-A funds was unchanged – AUM growth was also robust as multi-national corporations and large local institutional investors sought MMFs with good liquidity and security.
These growth trends are likely to persist in 2022 as ongoing pandemic and economic uncertainty encourage renminbi retail and institutional investors to hold elevated cash balances.
New rules, new competition
China’s asset management product rules, originally announced in April 2018, officially came into force in January 2022, after a one-year delay. The rules represent the most significant change in how China regulates its shadow banking sector since inception.
The new rules require banks to take their wealth management products (WMP) back on balance sheet, convert them to mark-to-market and, importantly, no longer guarantee returns. By the end of 2020, outstanding WMP had declined sharply as banks have repackaged and resold these products via their new asset management companies and this trend will continue in 2022. While similar, these products have several differences compared with mutual funds, so investors will need to exercise additional due diligence before investing.
Aside from the competition posed by new net asset value-style asset management products, MMFs will also face challenges from new mutual fund products, including negotiable certificates of deposit index and ultra-short duration funds, offering different characteristics and features. The government’s prioritization of environmental, social and governance factors, especially climate change and decarbonization, have also started impacting security issuance, fund developments and investor requirements.
Nevertheless, attractive returns, ease of use, high liquidity and good credit quality should help MMFs maintain growth momentum into 2022.
Aidan Shevlin is the head of international liquidity fund management at J.P. Morgan Asset Management.