Compliance

Fitch Smiles On China's Money Market Fund Reform Plans

Tom Burroughes, 25 January 2022

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Beijing is attempting to curb potential problems arising in areas of the financial system, a fact that has been highlighted by a number of recent episodes.

New Chinese rules designed to make money market funds more financially robust and reduce systemic risks have drawn a cautious welcome from one of the world’s major credit ratings agencies, Fitch Ratings.

Beijing proposes new rules governing investor concentration, leverage and exposure to certain investment products, and setting minimum amounts of high-quality assets. Policymakers are acting at a time when markets have been rattled by concerns sectors such as Chinese real estate, as in the case of the debt-laden group Evergrande. For several years, Beijing has also sought to rein in risks in what are called wealth management products. 

“The introduction of new rules for large money market funds in China should encourage funds to diversify across both end-investors and distribution channels, and could reduce systemic financial risks associated with the sector,” Fitch said in a statement. 

The Chinese government issued a draft of the proposed new regulations which were published on 14 January. Public consultation is due to conclude in mid-February.

“The requirements would lower credit risk associated with these MMFs [money market funds], thus contributing to financial stability. However, they may weigh on the yields of Important MMFs and cause capital outflows,” Fitch continued. 

Under the draft rules, asset managers are required to put aside at least 40 per cent of management fees as a risk provision, up from the current 10 per cent. Custodians and distribution channels will need to put at least 20 per cent of their respective fees aside as a risk reserve. 

“Fitch believes the cost of these risk reserves could lead fund providers to cap fund sizes and/or investor numbers, potentially leading to new fund launches to accommodate incremental demand. Furthermore, Fitch expects both fund providers and custodians will be incentivised to diversify fund distribution channels for all their MMFs under management,” the agency said. 

For the purpose of the rules, an “important” money market fund is defined as having more than RMB200 billion of assets under management, or more than 50 million investors.

As of end-September 2021, 18 mutual fund asset managers had over RMB200 billion ($31.59 billion) in AuM, with more than RMB6.7 trillion AuM in aggregate (67 per cent of total industry assets). Fitch said this represents the maximum level of funds which are likely to be affected by the new rules. In fact, the total will probably be lower because some asset managers may use multiple distribution channels.

The area of wealth management products has been a concern in China for some time. Regulators have forced banks to stop providing investors with implicit guarantees against investment losses. They have demanded stronger liquidity management stress tests to control risk. Banks cannot use WMPs to invest in any bank WMPs or provide a “channel service” for other institutions to bypass regulations.

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