China’s fund industry almost doubled in size in 2015 as a series of interest rate cuts spurred rapid growth of money market funds.
However, Chinese investors attempting to get their money out of the country are increasingly running up against tight restrictions imposed by Beijing.
Demand for Qualified Domestic Institutional Investor funds, which allow mainland Chinese investors to access overseas markets, has “surged”, according to Moody’s, the credit rating agency, which said demand was driven by China’s stock market crash in 2015 and the weakening of the renminbi.
However, with Beijing battling to stem capital outflows in order to prop up the renminbi, the State Administration of Foreign Exchange has frozen the quota for these QDII funds at $90bn since March 2015.
As a result, 27 of the 108 QDII funds in existence have been forced to suspend subscriptions, Moody’s says, while a further 47 have suspended large-scale subscriptions.
Overall, assets under management in China’s fund industry rose by 87 per cent in 2015 to more than Rmb8tn ($1.2tn), by far the most rapid pace of expansion on record, as the first chart shows.
The surge was driven primarily by a 109 per cent rise in the assets of money market funds to $684bn. China now boasts the second-largest money market fund sector in the world, after the US but now ahead of Ireland, with 14 per cent of assets under management.
Demand for money market funds has been fuelled by six interest rate cuts between November 2014 and October 2015, which slashed household deposit rates from 3 per cent to 1.5 per cent, as the second chart shows.
Deposit rates have fallen further still in the wake of their liberalisation last year, with Moody’s reporting that the saving account deposit rates quoted by China’s biggest four banks are currently just 0.3 to 0.35 per cent.
In contrast, China’s largest money market fund, Yu’e Bao, linked to Alipay, China’s leading online and mobile payments service, currently yields 2.4 per cent.
Vanessa Robert, senior credit officer at Moody’s, said the money market fund sector was set to expand further still as new distribution channels are rolled out and the industry penetrates China’s lower-tier cities.
Guidelines introduced earlier this year imposing tighter liquidity, maturity and concentration constraints on money market funds, bringing them more into line with global norms, should also make the sector more attractive to corporate treasurers seeking low-risk cash products, Ms Robert argued.
China’s far smaller bond fund sector also doubled in size in 2015 to about $90bn, and Moody’s expects “significant” further growth over the next two to three years, driven by rising demand from both domestic institutions and foreign investors, with the latter expected to seek Chinese bonds in the wake of the IMF’s decision to add the renminbi to its special drawing rights basket last year.
In contrast, equity funds saw sluggish growth last year, with assets under management, currently also about $90bn, not helped by the bursting of China’s stock market bubble.
Moody’s expects the overall Chinese fund industry to continue to grow strongly over the next five years.
One driver is likely to be China’s fast-growing social security fund, which expanded by 120 per cent in the four years to December 2015 to Rmb1.9tn ($290bn). At present just 54 per cent of its assets are run by external managers, a figure Moody’s expects to rise.
More broadly, despite last year’s rapid growth, China’s fund industry still remains small for a country of its size, with its assets equivalent to just 12 per cent of gross domestic product.
This figure is comfortably below that of several other major emerging markets such as South Korea, where fund industry assets are a quarter of GDP, and Brazil, where the figure is 42 per cent, let alone developed nations such as the UK, US and Australia, as the final chart shows.
“[These] drivers, along with regulatory liberalisation and financial market reforms, will lead to continued strong growth momentum for the sector in the next five years,” said Ms Robert.
