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Risk-aversion Helps China MMF assets hit three-year high, says Fitch

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Rising demand from retail and institutional investors in Q212 helped drive assets in Chinese open-ended money market funds (CMMFs) to their highest level in three years, according to Fitch Ratings’ calculations.

Total assets under management rose by RMB61.8bn during the quarter to about RMB358.9bn (USD54.5bn), and are up from approximately RMB97bn at end-Q210.

A key driver of the inflows was the ongoing risk-aversion among Chinese investors, given that local equity markets were flat in H112, but still down year-on-year by about 20% (Shanghai Composite Index) – with little turnaround in sight. Furthermore, the Chinese central bank has lowered interest rates twice this year to boost economic growth.

We believe that CMMFs will remain an attractive haven for eligible investors in the current volatile capital market environment. Dynamics for CMMF flows remain largely influenced by short-term investment considerations, primarily in retail, but we believe that longer-term the rising institutional offerings will put a floor to the asset base, even if equities resume their rise. Dedicated offerings for institutional investors comprised about 42% of assets at end-H112.

A key challenge for the management of CMMFs is the replacement of maturing T-Bills issued by the Peoples Bank of China or the Ministry of Finance, since there has been no new issuance so far this year. This may have adverse implications on CMMFs’ average credit quality and liquidity profile, which investors need to scrutinise.

Market concentration among the largest 10 management companies in the CMMF sector has remained high in the latest quarter at about 72%, and assets at those companies rose by about RMB43.0bn quarter-on-quarter according to Fitch’s calculations. This underlines demand for experienced players with internal credit research capacity.

CMMFs now represent a more established tool for a rising share of systematic asset allocation, as they have been growing consistently over the last four quarters. CMMFs gave investors an average return of about 3.13%, calculated as the asset-weighted seven-day annualised return to end-June 2012.

At end-H112, the industry consisted of 51 funds, of which 32 provide B-class offerings which are designed to meet the needs of institutional investors. Two new companies came to the market in Q212, and one offered a B-class to its existing fund.

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