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China dampens some size risk in vast money fund

Alastair Sewell calls the Yue Bao money market fund a ‘perfect union of technology and finance.’

Platform now open to other managers, but overall resiliency still questioned

Tianhong Asset Management Co. Ltd., the maiden manager of Hangzhou-based Ant Financial Services Group's Yue Bao money market fund platform, has been squeezed this year by Chinese regulators worried about the fund's mammoth size, even as a growing swarm of competing managers taps into the e-commerce phenomenon's winning formula.

The Yue Bao platform, launched in 2013 with Tianhong — a 51% Ant Financial affiliate — as its sole manager, began adding more managers late last year in response to regulatory concerns after Tianhong's share of China's fast-growing pool of money market assets surged to more than 25%. Amid moves by the Beijing-based manager to temper new inflows and continued waves of regulatory tightening to assure sufficient liquidity, assets under management for Tianhong's flagship money market fund have dropped to around 1.3 trillion yuan ($187 billion) now from 1.45 trillion yuan at the end of June and a record 1.7 trillion yuan at the end of March.

With smaller managers picking up the slack, the concentration risks posed by Tianhong's fund — which still boasts more than 15% of mainland money market assets — have decreased but remain considerable when compared with the 4% to 5% market shares commanded by top money market funds in the U.S. and Europe, said Alastair Sewell, London-based senior director with Fitch Ratings Inc. and head of that firm's fund and asset manager group for Europe, the Middle East and Africa, and Asia-Pacific.

Carries risks

If Tianhong's explosive growth of recent years has stalled, the growing dominance of a Yue Bao model Mr. Sewell called a "perfect union of technology and finance" — offering bank-beating yields on amounts as low as 1 yuan from Alipay accounts easily used for e-commerce payments — carries its own risks for China, some observers say.

Chinese regulators are doing what they can now to minimize money fund investments in longer-dated paper offering relatively high yields, but at the end of the day these platforms are taking huge sums of money from very short-term investors, said Vineet K. Vohra, Singapore-based director and practice leader with asset management industry manager consultant Arete Financial Partners. The money market fund system has yet to be battle-tested, and it's uncertain how resilient it will prove when everybody rushes for the exits at the same time, he added.

Analysts, meanwhile, see retail investors continuing to drive the growth of China's money market fund totals. Money market funds, in turn, continue to dominate China's mutual fund industry, accounting for two-thirds of the market as of June 30, according to a report by Fitch Ratings.

The comparable figures for the mutual fund markets in the U.S. and Europe are below 15%.

The weakness of stock markets on the mainland in 2018, with the composite indexes for Shanghai and Shenzhen down roughly 21% and 29%, respectively, year-to-date through Dec. 7, has fueled continued retail investor demand for money market funds, noted Miao Hui, a Shanghai-based senior analyst with Cerulli Associates, in an interview.

Total money market fund AUM in China surged to 8.6 trillion yuan as of July 31, up 50% from the year before, according to the Fitch Report. From the end of 2016 through June 30, China's share of global money market assets surged to 19.5% from 12.3%, Fitch said.

That strong growth, combined with relatively high fees of around 30 basis points, has proven a "heady combination" for domestic money managers and their international joint venture partners alike, Mr. Sewell said.

The Fitch report noted that the number of mainland money market funds with more than 100 billion renminbi, or about $14 billion, jumped to 14 as of June 30 from just three a year before.

Sharing the bounty

That broader sharing of China's money market cornucopia reflects moves by Alibaba to spread the wealth.

At the end of 2017, Alibaba broke the direct link between Yue Bao and Tianhong Asset Management, allowing e-commerce users to access any number of approved money fund managers — 13 currently — on the group's Alipay fund platform, Cerulli's Ms. Hui noted.

The ability to plug into the Alipay platform has proven a boon for those managers.

Tianhong's original fund still accounts for the bulk of the 1.9 trillion renminbi managed by money market funds on the Alipay platform at the end of September, but "others have seen very significant growth" as well, Mr. Sewell said.

For example, a money market fund managed by Shenzhen-based Bosera Asset Management Co. Ltd. added to the platform this year saw its AUM surge to 143 billion renminbi in September from 3 billion renminbi in March.

As the owner of the client relationship, meanwhile, Alipay shares in the success of that expanded group of money managers on its platform.

Cerulli's Ms. Hui says the platform provider will typically take anywhere between 30% and 60% of the 30-basis-point management fee managers receive. Le Shen, a Shanghai-based spokesman for Ant Financial, the financial services technology arm of Hangzhou-based e-commerce giant Alibaba Group Holdings Ltd, declined to comment.

Meanwhile, Alibaba's biggest e-commerce competitor, Shenzhen-based Tencent Holdings Ltd., with more than 1 billion e-commerce users, led by its WeChat messaging app, has named the first four money fund managers approved to offer a product on its platform to compete with Yue Bao: Guangzhou-based E Fund Management Co. Ltd., Beijing-based Harvest Fund Management Co. Ltd., Shenzhen-based China Southern Asset Management Co. Ltd. and Shanghai-based China Universal Asset Management Co. Ltd.

Concentration concerns

If Tencent's platform proves capable of garnering flows similar to Alibaba's, China could see 30% or 40% of its money market fund assets concentrated on those two platforms, noted Fitch's Mr. Sewell and Li Huang, Shanghai-based associate director, fund and asset manager rating group.

While the growing number of underlying managers decreases concentration risks, the fact that platforms will be handling a number of money market funds that investors can move among will add operational risks — a technically challenging proposition, the two Fitch analysts said in an email.

"The e-distribution channel is one of the most eye-catching features differentiating China from other (money market fund) markets where this channel simply does not exist in as material a way, if at all," Mr. Sewell and Ms. Huang said, adding "We will be monitoring the development of this new platform closely."

Industry veterans say getting onto the right digital platforms is becoming increasingly important in China, but providing good service and engagement with customers remains crucial as well.

Thomas Cheong, Hong Kong-based president of Principal Financial Group's North Asia business, said CCB-Principal Asset Management — his firm's joint venture with Beijing-based banking heavyweight China Construction Bank — is "in the queue" to join the Alipay platform but already ranks just behind Tianhong as China's second-largest money market fund manager, with roughly 500 billion yuan in assets.