New Rules, New Opportunities for Money Market Funds in China
An Executive Interview with Kheng Leong (KL) Cheah, Head of J.P. Morgan Global Liquidity Sales, Asia Pacific
In this month’s Executive Interview, KL Cheah, Head of J.P. Morgan’s Global Liquidity Sales for Asia Pacific talks to Helen Sanders, Editor, about the recent regulatory changes for China on-shore RMB money market funds (MMFs) and the impact on corporate cash investors in China.
What particular investment considerations are important for corporate investors in China?
Unlike their retail counterparts, corporate investors tend to look for investments that support their wider business needs rather than solely focusing on high returns. In addition, corporate treasurers view both liquidity and strong credit quality as an important consideration in their investment portfolio; in order to readily provide for day-to-day business operating costs, and to best preserve capital, respectively. Hence, corporate treasurers actively seek investments which allow flexible liquidity, as well as effective credit risk management.
Also, more rigorous risk and credit analysis is critical for corporate investors as there has been a big increase in credit defaults since 2015. For example, the number of credit defaults during the first quarter of 2016, was equivalent to the whole of 2015. As MMFs amply fulfil the corporate investment objectives of capital preservation, flexible liquidity and market driven yields, it is not surprising that there has been significant corporate investment growth in the MMFs space in China over the past few years, a trend that is likely to continue in the near future.
What likely impact will recent regulatory changes introduced by China Securities Regulatory Commission (CSRC) have on corporate investment in MMFs?
As China develops a more open market, we are seeing more and more regulatory activity to support this evolution. For example, in order to align domestic financial instruments in China with equivalent instruments outside of China, CSRC introduced new money market fund (MMF) regulations in February 2016 which resulted in a number of obligations for fund managers to bring MMFs in China more in line with MMF offerings globally; such developments include more proactive credit controls, stricter liquidity management and greater transparency in fund disclosure.
As yet, it is still too early to say what impact these changes will have on investor appetite for MMFs, but many of the MMF providers in China are finding it difficult to adhere to the more stringent guidelines. However, the recent CSRC changes will have little or no impact for investors of MMFs which are AAA rated by international ratings agencies (such as the CIFM RMB Cash Liquidity Fund and CIFM RMB Money Market Fund ), as international ratings criteria are already more rigorous than the new CSRC regulations.
Can China on-shore MMFs be considered the equivalent to short-term MMFs in Europe or 2-a7 funds in the United States?
This is the direction in which they are moving towards but there are still some significant differences between China on-shore MMFs and MMFs domiciled in the United States and Europe. For example, leverage (the act of borrowing monies to purely invest in additional securities) is not permitted in the United States, and is limited to only 10% of overall assets in Europe whilst the majority of Chinese MMFs still permit up to 20% of leverage on overall assets . In addition, US and European MMFs have a maximum WAM of 60 days and WAL 120 days, compared with 120 days and 240 days in China, respectively. Other key differences also exist, so corporate investors need to be clear about the characteristics of MMFs in each region, and define their cash investment policies accordingly.
Given the changing market and regulatory environment, what actions would you recommend to corporate investors in China?
Corporate investors need to ensure that they have a robust investment policy that clarifies and adheres to the company’s risk appetite. Larger multinationals typically already have a clear investment policy in place, but their global policies may need to be tailored for specific investment conditions in China. Also, Chinese businesses that have been accustomed to a largely protected investment market now need to be more aware of the risk factors involved with on-shore investment so they are better able to make investment decisions in an increasingly deregulated China market.