Investors pull out of low-risk funds

Money market funds have seen a wave of redemptions recently, with investors turning to short-term wealth management products (WMPs) that offer higher return rates, but the situation will change as the current tight liquidity eases, analysts said Wednesday.

Ping An Insurance Co and China Life Insurance Co have sold almost all their money market funds, Shanghai-based Oriental Morning Post reported Wednesday, citing sources at several fund companies.

One fund firm said half of its money market funds had been redeemed, and another fund company said two-thirds of its money market funds had been redeemed, mostly by institutional investors, the report said.

At the same time, banks such as China CITIC Bank and China Merchants Bank as well as fund companies and brokerage firms have rushed to launch short-term WMPs, with an annualized return rate of as high as 13 percent.

Financial institutions have been suffering recently from an urgent need for liquidity, which is one reason why they have been eager to offer WMPs.

The high returns have attracted many investors. At least 13 Shanghai-listed companies have announced plans this month to purchase banks' WMPs in deals that could be worth billions of yuan.

Redemptions of the low-risk, low-return money market funds happened because investors want to get the higher returns available from short-term WMPs, Qiu Yanying, chief analyst with TX Investment Consulting Co, told the Global Times Wednesday.

Heavy redemptions reduce the rate of return from money market fund products, and some products even saw negative yields recently, Qiu said.

The average annualized rate of return from 227 of the nation's money market funds in June so far has been only 3.29 percent, and the rate declined to 2.75 percent last week, according to a report released Tuesday by jnlc.com, a financial investment data provider.

In comparison, the average annualized rate of return for short-term WMPs is 6 to 7 percent, Zeng Linghua, an analyst with fund consultancy Howbuy, told the Global Times Wednesday.

Some other investors in money market funds redeemed them in order to ease their own capital liquidity rather than because they were seeking higher profits, according to Qiu.

The declining rate of return and ongoing redemptions of money market funds will last till the middle of July, when the tight monetary liquidity is likely to ease, Zeng said.

However, Qiu said the situation may last for three to five months, if the central bank does not inject more liquidity into the market.

But temporary money market volatility can be relieved as banks adjust their capital structure, and it is unlikely to lead to systemic risks, he noted.

The People's Bank of China said Monday that the country has ample cash reserves and that the current tight liquidity will ease gradually.

The overnight repurchase rate, a benchmark for inter-bank borrowing costs, fell to 5.6 percent Wednesday from a peak of 12.85 percent last Thursday.