China investors flock to money market funds despite record low yield

SHANGHAI (Reuters) - Chinese investors have poured cash into money market funds despite falling yields on the low-risk instruments as authorities enact powerful monetary easing to combat the impact of the coronavirus epidemic.

China’s biggest money market mutual fund, overseen by billionaire Jack Ma’s Ant Financial Group, has seen its yield falling to the lowest since it was launched in 2013.

Tianhong Yu’e Bao’s 7-day annualized yield dipped below 2% this week and eased further to 1.9670% on Tuesday, according to Tianhong Asset Management Co, the fund’s manager.

Money market funds are traditionally considered low-risk and liquid as they normally invest in high-quality assets including government bonds, and yield is closely related to general cash conditions in the financial system.

But the yield has been steadily declining since the beginning of the year as authorities ensured the banking system had sufficient funds to lower financing costs as they support the slowing economy.

But the lower yield has not driven investors away.

Data from the Asset Management Association of China (AMAC), which is supervised by China’s securities regulator, showed the value of China’s money market mutual funds at 8.08 trillion yuan ($1.14 trillion) at the end of February, accounting for 49.37% of the total size of mutual funds and up about 960 billion yuan from the end of 2019.

Some market watchers said the funds remained the first choice of many investors for their safe-haven asset allocation amid higher volatility in Chinese A-share market and lower returns from bank’s wealth management products.

“For companies yet to fully resume production, they choose money market funds for their short-term investment needs,” said Wu Qiong, deputy director of research at Hexa AMC.

“While for banks, the repo rate is too low, investing in money market funds is also a better option.”

China’s primary repo rates fell sharply, with the overnight borrowing cost hitting a record low on Tuesday as liquidity in the system remained ample and the central bank unexpectedly lowered the interest rate on financial institutions’ excess reserves for the first time since the global financial crisis.

The volume-weighted average rate of the benchmark 7-day repo CN7DRP=CFXS traded at 1.2858% on Wednesday, below the country's one-year benchmark deposit rate CNCBDR=ECI of 1.5%.

Many market participants expect yields on money market funds to fall further in the short term.

Separately, mainland investors bought a net HK$139 billion of Hong Kong shares in March through the Stock Connect trading link, a record high, according to Reuters’ calculation based on official data, as prices of Hong Kong-listed “H-share” Chinese companies lagged mainland-listed A-shares the most in two years.

Reporting by Winni Zhou and Andrew Galbraith