A Look at China's Money Market Funds

What is an MMF?

Per the Tentative Provisions, an MMF is a fund that only invests in money market instruments; it is included in the category of securities investment funds and its legal framework falls within the legal framework of securities investment funds.

As designated in the Tentative Provisions, MMFs can invest in money market instruments including cash, bank term deposits or large-amount certificates of deposit (i.e., with a term not more than one year), bonds (with maturity not more than 397 days), bond repurchases (with a term not more than one year), central bank notes (with a term not more than one year) and other money market instruments with good liquidity that are permitted by the CSRC and the PBOC.

An Emphasis on Safe and Standard Operation

The inherent characteristics of MMFs are generally described as very liquid, low risk and with an almost guaranteed return. To meet these attributes, the Tentative Procedures specify that MMFs are prohibited from investing in stocks, convertible bonds, bonds with maturity more than 397 days, corporate bonds with ratings lower than AAA and other instruments forbidden by the CSRC and the PBOC.

Secondly, the Tentative Provisions provide strict limitations on the percentage of various money market instruments invested by MMFs: (1) the percentage of investment in the same short-term corporate bonds shall not exceed 10% of the fund's net asset value (NAV); (2) the capital deposited in the same custodian bank shall not exceed 30% of the fund's NAV; (3) the capital deposited in non-custodian banks shall not exceed 5% of the fund's NAV; and (4) funds raised in the national bond market by the MMF's pledge over a basket of bonds shall not exceed 40% of its fund's NAV.

Thirdly, given the low risk in money market instruments, the interest rate fluctuations may be the only big threat. In consideration of stability and safety, the Tentative Provisions indicate that the average maturity of all money market instruments invested by an MMF shall not exceed 180 days.

Furthermore, MMFs' transactions and settlement in the national interbank market shall comply with the PBOC's rules for interbank transactions and be supervised and examined periodically by the PBOC.

What's New?

The Tentative Provisions provide that MMFs, which do not collect subscription and redemption fees, are entitled to set aside up to 0.25% of the fund's assets for the expenses of fund sales and services to fund holders only. The Tentative Provisions also mandate that MMFs distribute profits every day and forbid any kind of profit commitments.

According to Article 12 of the Tentative Provisions, MMFs can choose new valuation methods, and there is an implication that MMFs may proportion profit daily and price the value of a fund with everyday corresponding profit, which is quite different from securities investment funds.

What's Remarkable?

Article 2 mentions that MMFs may invest in bank term or large-amount certificates of deposit (i.e., with terms not more than one year) and Article 5 mentions the capital percentage that is deposited in custodian or non-custodian banks. The above provisions show that MMFs will be another type of investment vehicle that can negotiate on the price of short-term (one year or less) certificates of deposit. On the one hand, these regulations indicate China's new trial in the marketization of deposit interest rates. On the other hand, the Tentative Provisions are an innovation that allows the appearance of large-amount bank certificates of deposit, a new type of instrument in money markets. In developed countries, large-amount bank certificates of deposit not only are primary instruments for commercial banks to collect short-term loans, but are also important investment instruments for MMFs. Allowance of issuance of large-amount bank certificates of deposit will make it possible for all kinds of commercial banks to adjust the size and structure of their loans automatically. In addition, investors will have the opportunity to enjoy higher profits.

What Remains to be Done?

Although large-amount bank certificates of deposit and central bank notes are listed as money market instruments, commercial notes and commercial bank notes are not included in the Tentative Provisions. The exclusion of commercial notes and commercial bank notes is probably a result of the relative stage of development of China's funds and money market instruments. After all, the domestic commercial notes market has not become fully developed, the computerization of China's notes market is comparatively inferior and is also subject to the PRC Negotiable Instruments Law.