Money-market fund emerging

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Last updated at: (Beijing Time) Monday, October 13, 2003

Money-market fund emerging

China's financial regulators look poised to approve the nation's first batch of money market funds soon, although some major market players argue that the timing could be better.

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China's financial regulators look poised to approve the nation's first batch of money market funds soon, although some major market players argue that the timing could be better.

A few days after the release of a tentative money-market fund regulation for public comment late last month, the China Securities Regulatory Commission heard reports from a handful of fund-management firms - including Boshi, Hua'an and China Merchants - on their money-market fund products.

With China Merchants believed to be leading the race, securities brokerages and commercial banks are also jumping on the bandwagon of what is expected to be a lucrative new business.

But some major market participants are sceptical. "We are not interested (in launching money-market funds)," said a senior manager with a State-owned commercial bank.

"There is already a shortage (of bonds) in the bond market. They (new money-market funds) will only inject additional funds and force interest rates further down," he added.

A recent increase in required reserves at financial institutions has frozen large amounts of funds and nudged up prices. Nevertheless, the months-old downward trend of interest rates in the money market - where short-term financial instruments such as bond repurchase agreements and commercial bills are traded - remains largely intact.

"Liquidity is fairly tight these days, but the overall trend is the same: Bonds are in short supply," said the manager, who asked not to be named. "Most big banks are not interested because, as investors, we simply don't want interest rates to go too low."

But fund-management firms, whose commissions are not directly affected by price movements, have been enthusiastic about the prospect.

Jiang Rongfeng, a manager with GTJA Allianz Funds, said: "We think that the money-market fund, as a low-risk type of fund, has a promising future. It not only provides a good cash-management product with high liquidity ... but has great significance in enriching the product line in China's fund-management market."

China's securities funds are having a difficult time. Share indices have fallen about one-third since June 2001, when a massive sell-off plan of State-held shares in listed companies was announced, starting more than two years of bear markets.

Market capitalization of tradable shares shrank by nearly 30 per cent to 1.34 trillion yuan (US$161 billion) in July this year from 1.89 trillion yuan (US$227 billion) as of June 2001.

Fang Fang, a researcher with Renmin University of China in Beijing, said: "The high risk of the capital market has dealt a heavy blow to investors. And it has become a common wish among investors to seek safe investments and stable returns."

Likewise, the securities companies are also pinning their hopes on the low-risk money market to revitalize their asset-management operations. Many are reportedly focusing on the asset-management products they are designing on money-market instruments.

According to the securities commission's draft regulation, a final version of which is expected to be issued by the end of this year, the new funds will mainly invest in bank term deposits, deposit agreements, short-term bonds and repurchase agreements, central bank papers and commercial bank drafts.

Commercial banks - especially smaller city banks and joint-stock banks - have joined the race in an attempt to expand their intermediary business. Earlier this year, a number of city commercial banks jointly created two funds targetting the interbank bond market, which were believed to be quasi-money-market funds, but it is not known if they have received regulatory approval.

The central People's Bank of China has expressed its support for commercial banks launching and managing money-market funds. Insiders say a major reason for this support is to attract more institutional investors to help stabilize the money market.

"They just don't want the buying power to be too concentrated, so as to prevent a monopoly," the senior bank manager said. The four State-owned commercial banks - the Industrial and Commercial Bank of China, the China Construction Bank, the Bank of China and the Agricultural Bank of China - bought up 40 per cent of the bonds on the primary market last year.

Despite all the zeal among would-be fund managers, some doubt if China's money market, after rapid growth in recent years, is big enough to accommodate a significant influx of new funds and suspect that the arrival of new funds may aggravate the imbalance between supply and demand.

It is widely believed that China is issuing too few bonds and needs to speed up, especially with regards to the short-term bonds that are expected to be a major choice of future money-market funds.

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