China’s finalised rules governing large money market funds (MMFs) will help enhance these major funds’ ability to resist risk, thus reducing systemic financial impact associated with the sector, says Fitch Ratings. The revised final version, compared to an earlier draft, will give regulators more flexibility in enforcing the regulation and lower the immediate pressure the large funds and distribution channels face upon implementation.
 
China’s regulators published finalised measures for large MMFs on 17 February 2023, which will come into effect on 16 May. The final version, consistent with our expectations, adheres closely to the draft version proposed in January 2022. The tightened requirements include leverage, single-issuer and investor concentration, duration, exposure to certain investment products, and minimum levels of holdings for specified high-quality liquid assets, among others. They apply to “important MMFs” meeting specific criteria and will reduce the systemic risks that could be spurred by sudden large-scale redemptions in these funds.
 
The regulators have modified several requirements in the final regulation from the draft version, but most changes are marginal and thus do not undermine the positive impact of a tightened supervisory framework for the sector. We continue to expect that no Fitch-rated Chinese MMFs will be affected by the new rules, because their sizes fall below the threshold for important MMFs.
 
Under the modified rules, important MMFs can invest in instruments with relatively high internal ratings, while the earlier draft only permits investments in instruments with the highest internal ratings. However, the definition of “relatively high” is unclear. Single-issuer exposure to a bank with a custody licence is now capped at 15%, lower than the 20% for non-important MMFs, but higher than the maximum 5% for exposures to other types of issuers.
 
These more accommodative thresholds on portfolio holdings in the final version were probably formulated in part to avoid triggering a potential disruption to the onshore bond market when the rules come into effect. They do not signify a departure from the authorities’ commitment to curtailing risks associated with the sector, although they may partly blunt the positive impact of reduced risk in the underlying portfolios. The requirements on portfolio holdings also remain generally more lenient than those in the EU and US.
 
Asset managers will still need to put aside a portion of management fees as risk buffer, but the final rules adjust the minimum requirement to 20%, up from the current 10% but down from the previously proposed 40%. The regulators also allow distribution platforms to stop funding the reserve once its balance reaches a level equivalent to 0.25% of important MMFs’ outstanding subscribed units, as of the most recent quarter-end. The change should lessen the cost burden on distributors, although the regulator retains the power to order ad-hoc funding if necessary. Under the current regime, distribution platforms are not required to hold a risk reserve.
 
The modified definition of “important MMFs” allows the China Securities Regulatory Commission to grant exceptions, thus giving the authorities greater flexibility to regulate MMFs proportionate to their systemic impact. Both draft and final versions stipulate that if an asset manager manages more than one MMF under a single distributor, all MMFs managed by the asset manager under the distributor will be deemed important MMFs as long as the aggregate assets under management (AUM) exceed CNY200 billion or the combined number of investors exceeds 50 million.
 
This means more funds could be affected than intended, although China only had two MMFs with more than 50 million investors or AUM over CNY200 billion at end-2022, including Yu’e Bao Money Market Fund and E Fund Cash Management Money Market Fund.