China’s new rules for large money market funds (MMFs) will help to reduce the systemic risk in the sector, according to credit rating agency Fitch.
The rules were originally drafted in January 2022 in reaction to the growing size of the sector.
In August last year, China overtook Europe to be the second largest MMF market in the world, behind the US, worth more than US$1.6 trillion.
The demand has been largely driven by retail investors, that accounted for roughly 60% of total assets as of the end of 2021.
The heavy involvement of retail investors allied to the size of a handful of mega-funds connected to e-commerce giants such as the Yu’e Bao Money Market Fund and E Fund Cash Management Money Market Fund had raised concerns about systemic risk and investor protection and spurred the Chinese authorities to introduce regulation to curb such risks.
The regulation was finalised at the end of February and will come into effect in May this year.
The final rules address leverage, single-issuer and investor concentration, duration, exposure to certain investment products, and minimum levels of holdings for specified high-quality liquid assets, among others.
They will be applicable to “important MMFs” and, according to Fitch, will “reduce the systemic risks that could be spurred by sudden large-scale redemptions in these funds”.
Fitch also noted that the finalised rules do allow MMFs more flexibility than in previous drafts in terms of both portfolio holdings and the management fees that asset managers must put aside as a risk buffer.
According to the ratings agency, the more accommodative elements were probably formulated in part to avoid triggering a potential disruption to the onshore bond market when the rules come into effect.
“They do not signify a departure from the authorities’ commitment to curtailing risks associated with the sector, although they may partly blunt the positive impact of reduced risk in the underlying portfolios,” stated Fitch.
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