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Money Market Funds in China: An Ideal Place for Your Excess Cash
by Travis Spence, Head of Global Liquidity Asia Pacific, and Dania Von Wangenheim, Client Advisor Global Liquidity Germany, J.P. Morgan Asset Management
China has become an attractive investment destination, with both individual investors and companies opening their portfolios to Asia’s largest economy. Companies doing business in China have often faced the challenge of where to put their excess cash, with the best option not necessarily offering a good investment. However, improvements in China’s credit rating and regulatory change have allowed Chinese money markets to develop substantially in recent years. Money market funds (MMFs) and separate accounts have been a product of this development, giving companies in China a broader and better choice of investments for their excess cash.
Traditional cash investments may no longer offer the best option
Companies doing business in China historically had few options to manage their liquidity compared to international markets. Bank deposits have for a long time been the most popular investment choice for excess currency in China. However, as the yields and tenors of bank deposits are regulated by the People’s Bank of China (PBoC), rates are not necessarily aligned to real market yields, and are often lower. The bank deposits also tend to be short-term investments, not suited to companies wanting long cash positions.
Banks in China also offer structured deposits to investors. Some structured deposits are attractive, given their low risk profile, and they generally provide a higher yield than PBoC deposits. However, they are only suitable for short-term investments as they pose liquidity risks as positions can be difficult to unwind before maturity (penalties may apply). Thorough credit analysis is also necessary as the universe is wide, and transparency is usually low.
Another typical investment choice for companies operating in China is direct bond investments – government bonds, financial bonds and corporate bonds. However, gaining access to the market requires proper licences and therefore involves the setup of finance companies onshore or partnerships with brokers. Companies will need to consider whether they have the capabilities to manage such investments, let alone getting access to good pricing.
A first real alternative
A key development in recent years has been the introduction of MMFs, providing a real alternative to bank deposits for companies operating in China. Part of this has been due to China becoming a more attractive investment destination, with China’s credit rating rising five notches to AA- in the last ten years. This is an impressively quick increase, and has improved investor confidence in Chinese money markets.
The Chinese money markets also benefit from Asian issuers’ image as an asset sheltered from global volatility, which has been more apparent in recent global volatile markets. Interest rates are also higher in Asian nations, including China, than a lot of developed countries globally, and currencies have been appreciating. A bias is therefore developing towards holding local currencies. In addition, company cash balances are growing faster in Asia than other regions as business expands, and China is helping forefront this trend. With this expansion comes a shift towards maximising returns of the growing pools of excess working capital, equity capital and deal cash.