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1. Money Market Funds’ (MMF) NAV Size Decline in 2H 2018 - Contributing Factors Include: New Regulations, Competition and Lower Rate of Return

Following several years of rapid expansion, money market mutual funds have quickly become one the most broadly adopted mutual fund product in terms of overall NAV and profitability.  Roughly half of all money market funds were sold via online/mobile channels. These wealth management products, collectively known as “Baobao”, are well-liked for their accessibility, convenience and ease of use.

Regulations

As the industry gained momentum in recent times, the rapid expansion and competition of money market funds has accelerated the need for regulatory intervention. 

• In August 2017, the China Securities Regulatory Commission (CSRC) issued “Provisions on the Administration of Liquidity Risk of Publicly-Offered Open-End Securities Investment Funds,” imposing limitations on investment horizon and variety of investable securities for money market funds.  
• In late 2017, the Asset Management Association of China removed money market funds from its mutual fund size rankings, lowering incentives for mutual funds to push for online money market fund sales, as a measure to alleviate pressure from excessive competition. 
• In mid-2018, the “Guiding Opinions on Further Regulating Services Concerning Internet Sales and Redemption of Money Market Funds” was issued, imposing additional limitations on same-day withdrawal (T+0 service), mandating that only commercial banks with relevant qualifications would be permitted to provide any form of advanced payment related to withdrawals, further slowing down growth of the industry.

Competition

The emergence of short-term wealth management funds with different underlying assets (government and corporate bonds) and the development of banks’ various same day transfer wealth management products (T+0 service) also grabbed a slice of the pie diverting short term funds away from online wealth management products. 

Rate of Return

With money market products becoming the largest mutual fund type in China in terms of underlying assets, rate of return for online money market fund products dropped along with interbank overnight rates as a result of targeted easing measures in the second half of 2018.

The slowdown in both the online and overall money market fund market which has been happening since late 2017 has been affected by the combination of factors stated above. According to the Asset Management Association of China, the industry’s overall NAV saw its first quarterly decrease in 4Q 2018.

Rong360 Big Data Research Institution is currently monitoring 78 online ‘Baobao’ products with 117 underlying money market funds. By the end of 4Q 2018, 4.63 trillion yuan remains vested in these products, representing a 302.9 billion yuan decrease from the end of Q3 2018, down 6.14% month over month.

2. Marketing Platformls Are Key for NAV Growth. Alipay’s Yu’e Bao Product Line Grew by Over 2000%

Compared with return rate-sensitive institutional investors, retail investors prefer accessibility, ease of use and liquidity, which makes marketing channels key for NAV growth. In 2018, among the 117 online wealth management products Rong360 Research Institute monitors, around 60% achieved year-over-year growth in NAV. Among the 28 products which doubled in size, more than half were offered within the Alipay and Tencent ecosystem.  Among the top 10 fastest growing online MMF products, half of them were offered within Alipay’s Yu’e line. 

In response to the additional guidance from regulators, Alipay upgraded its Yu’e Bao products and reduced concentration for Tianhong Yu’e Bao Money Market Fund in May 2018 while launching 2 additional MMF products within the Yu’e Bao line of products (BoShi Cash Earnings Monetary A, ZhongOu Gunqianbao Monetary A). Following Yu’e Bao’s upgrade, Tianhong Yu’e Bao Money Market Fund saw a year-over-year drop of 28% in size to 1.13 trillion RMB, still taking the lead in net AUM, while the 2 MMF product introduced in May 10 additional MMF introduced to the Yu’e Bao platform later the year on average achieved an astonishing growth of over 2000%.

In summary: 

In summary, facing competition from substitute products and pressure from decreasing rate of return, in order to maintain market demand for money market funds, the industry will likely evolve in one of two directions: either transforming from retail to institutional facing service; or in order to remain competitive, utilize research capabilities and further take advantage of asset allocation capabilities.

While it may be difficult for online money market fund products to regain its striking growth momentum, and with the possibility that absolute returns may continue to decline, money market products have become indispensable for MMF providers and investors as the most profitable product and often used investment vehicles. We believe that overall scale of MMF products will likely continue to stabilize over time.

Money Market Funds See Total Net Asset Value (NAV) Drop in Late 2018 Marketing Platforms Key for NAV Growth