MNI ANALYSIS: High-Yield Money Mkt Funds Jump On Bank Appetite

--Money Market Fund Investments in High-Yield NCDs Make Them More Attractive

     BEIJING (MNI) - The total amount invested in Chinese money market funds

(MMFs) surged in July as banks ramped up their investments in these vehicles due

to lack of alternatives and the high rate of return on funds' investments in

negotiable certificates of deposit (NCDs). 

     This trend is likely to continue in the near-term, but may be

short-circuited by stricter rules on NCDs reportedly being considered by

regulators.

     In July, the total amount invested in money market funds increased CNY751.7

billion to CNY5.86 trillion, a rise of 14.7%, the largest increase this year,

according to data from Asset Management Association of China.

     The rising yields on negotiable certificates of deposit contributed to

boosting money market funds, as the investments in the former make the yields of

latter more attractive.

     The yield on a three-month "AAA+" rated NCD, the type of NCD in which money

market funds mainly invest, rose from 4.01% on June 30 to 4.22% on July 31. As

the yields of NCDs have risen, money market funds have invested an increasing

share of their portfolios in them. 

     Funds increased their holdings of NCDs by CNY429.6 billion in July,

accounting for almost the entire net increase of NCD issuance of CNY433.1

billion last month, according to data from Shanghai Clearing House and China

Central Depository and Clearing Company. Funds also increased their aggregate

net position in NCDs by CNY328.6 billion in July out of a total increase in

their portfolios of CNY384 billion, showing how aggressive funds have been in

buying up NCDs.

     Money market funds' half-year reports underline the trend. Money market

funds' total aggregate NCD position increased CNY205.6 billion in the second

quarter to CNY1.04 trillion, accounting for 17.3% of total money market fund

assets, and for 71.7% of investments in bonds, according to Shenwan Hongyuan

Securities.

     The obvious draw of MMFs for investors, particularly banks: higher yields.

     "Our research shows there are signs that banks are investing a lot

recently, and one important destination is money market funds," CICC said in a

weekend report.

     "Bond funds have only averaged a return of 1.49% so far this year, below

the return of money market funds," CICC said. "Besides, money market funds have

other advantages: they are tax-free, they have low credit risks and they have

good liquidity, among other things."

     According to Tianfeng Securities' estimates, banks increased their total

purchases of money market funds by CNY600 billion to CNY700 billion in the

second quarter, accounting for a little more than half of the total increase of

money market funds purchases of CNY1.2 trillion during that time.

     The new-found prosperity of money market funds has clearly been aided by

the government's crack-down on interbank arbitrage. The once-popular behavior of

big banks to invest money in interbank wealth management products has decreased

significantly due to new regulations on these products, with big banks are

increasingly turning to money market fund investments as replacements.  

     In turn, money market funds are investing more in NCDs issued by small and

medium-sized banks because their yields are higher. This is helping to channel

big bank money to smaller institutions, who rely heavily on wholesale financing.

     In this way, money market funds are a new link in the interbank funding

chain.

     "Money market funds have become a new interbank channel replacing the old

one" under which smaller banks borrowed directly from big banks, Ming Ming, an

analyst at CITIC securities said in a report. "They help small and medium-sized

banks to get money from those big banks."

     Moreover, as the yields on money market funds have risen, many individual

savers have withdrawn their bank deposits to invest in money market funds. This

has increased smaller banks' demand for funds, causing them to issue yet more

NCDs at higher rates. 

     The frenzy for money market funds is likely to heat up further in September

even as NCD yields have continued to rise this month. 

     The yield on a three-month "AAA+" rated NCDs rose around 20 basis points to

4.425% on August 28 compared to 4.22% on July 31. With a total of CNY2.29

trillion of NCDs at lower yields maturing in September, the highest volume of

expirations in any month this year, NCD yields are likely to rise further,

making money market funds that invest heavily in NCDs more attractive.

     "Considering the huge rollover pressure of NCDs in September and the

current yield level, the yields of NCD are still likely to go up," CICC said.

"We estimate the yields could go up anywhere from 10 to 30 basis points."

     But stricter regulation threatens to eventually end the party for money

market funds.  

     A new rule being considered by regulators would prohibit money market funds

from investing on NCDs whose ratings are below "AA+", the Securities Times

reported earlier this month. According to the data from CITIC Securities, a

total of 214 banks, all small and medium-sized, have a lower rating than this,

so if the reported new rule is implemented, it would cause their financing to be

more difficult.

     "A lower demand for low-rated NCDs would cause smaller banks to suffer from

heavy (funding) pressures," Shenwan Hongyuan Securities said in a report. "Money

would flow from small and medium-sized banks to big banks" under this scenario. 

     Small and medium-sized banks will "be forced to contract their balance

sheets" if the new rule materializes, Xiamen International Bank warned.

     To avoid spooking the market, regulators are likely to treat existing money

market fund investments differently than future ones.

     "Around one fourth of money market funds' NCD positions are more than 40%

of their total assets, so pressure to reach the requirements of the new rule

would be big," Shenwan Hongyuan Securities said. "To prevent instability in the

financial system, we cannot exclude the possibility that regulators will apply

the new rule only to newly formed money market funds."

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

[TOPICS: M$A$$$,M$Q$$$,MT$$$$,MX$$$$,MN$MM$]