Money market funds refer to funds that only invest in money market instruments. The investable financial instruments include cash, bond repurchases, central bank bills, interbank deposit certificates and bank deposits that with a maturity of less than one year, and the bonds, non-financial corporate debt financing instruments and asset-backed securities that mature within 397 days or less. Money market funds are generally less risky than the other funds. Money market fund was first found in China in October 2003 with four peaks in 2004-2006, 2008, 2011 and 2013-2014. All of the four peaks are related to the stock market downturn and technological breakthrough.
The first peak happened in 2004, in which money market funds were just introduced in China. At that time, the stock market was in a downturn, and the government introduced a number of policies that related to the money market funds, boosting the total net asset value of the money market fund increased significantly to 186.8 billion yuan. The second development peak occurred in 2008. At that time, financial tsunami has triggered a series of financial crises, including credit crises and liquidity crises, causing investors to switch their investments to money market funds. The third peak occurred in 2011. At that time, Chinese stock market was in a downturn, and the “Notice on Strengthening Risk Control of Money Market Funds” was released, which eliminated the requirement for the money market fund to withdraw the agreed deposits in advance. This notice has boosted the liquidity of money market funds and has attracted more investors to invest in. In 2012, its total net asset value has reached 700 billion yuan. Finally, the fourth peak happened in 2013 since the introduction of Yu’EBao. Under Yu’EBao, Money market funds can provide T+0 fast redemption, making them become more attractive towards investors.
Total Net Asset Value of China Money Market Funds
Source: Wind Financial Terminal, Noble Apex/iFund
However, with the rapid development of the money market fund, the supervision of the China Securities Regulatory Commission on the money market fund has become more rigorous. According to the data from Wind Financial Terminal, the total net asset value of China money market fund has reached 8.4 trillion in the second quarter of 2018, accounting for 65% of the fund market ones. The size of some money market funds have even exceeded the individual income of banks, and their scale is large enough to cause systemic risks in financial market. Therefore, the China Securities Regulatory Commission started to raise the liquidity regulation on the money market fund. In June 2018, the China Securities Regulatory Commission and the Central Bank issued the ” Guiding Opinions on Further Regulating the Services Relating to the Internet Sales and Redemption of Money Market Funds” (Guidance Opinions), stating that investors can only withdraw 10,000 yuan from a single money market fund in one day, with an aim to control the market liquidity risk. In addition, in the “Guidance Opinions”, it also stated that payment companies were not allowed to pay the money market fund’s redemption with their own cash in advance. This guidance may lower the return rate of money market funds while the market liquidity risk may reduce.
Finally, the introduction of Yu’EBao has greatly boosted the development of the money market fund in China. However, it also increased the liquidity risk on China’s financial market. Therefore, we believe that restrictions on money market funds will become more stringent as it develops.