Pozen Cries Wolf on Chinese MMFs
The Financial Times posted an article, "Huge Growth in China's Money Funds Poses Risk." It says, "China's asset management industry has had explosive growth in the last two years following the arrival of online money market funds, which have transformed the way millions of Chinese invest their savings. The booming popularity of money funds, however, has led several investment experts to raise serious concerns about risks developing in the industry as a result. The funds' appeal is strong given that most of them offer annual returns of 4-6 per cent, compared with the 3 per cent Chinese individuals receive on their bank deposits. The returns have helped money market funds' assets under management grow nearly 15-fold in the past four years to Rmb1.9tn ($306bn) at the end of 2014, according to Goldman Sachs Asset Management. Robert Pozen, senior lecturer at Harvard Business School and former chairman of MFS Investment Management, the oldest US mutual fund company, fears investors are being drawn to the high interest rates without any understanding of the risks. The funds offer high interest rates, he says, but "they are not explaining that in many cases this type of paper is not top quality. This is essentially what we would call primary junk funds in the US -- paper that's usually below investment grade, fluctuates daily in terms of interest rates and from time to time defaults. "The big risk is selling to relatively unsophisticated investors over the internet who probably do not know what they are getting into. There is a real possibility of loss here." The FT piece continues, "The biggest winners from the influx of cash into online money funds have been large Chinese internet companies like Alibaba, Tencent and Baidu <b:>_. They were quick to recognise that selling money funds over the internet to consumers who were comfortable with online transactions could translate into big business. `Alibaba's money fund Yu'E Bao (Leftover Treasure), which is marketed to users of the group's online payment platform Alipay, has been particularly successful. Cash transfers from bank accounts to Yu'E Bao take just one click. `Its assets have risen from zero to Rmb578bn in less than two years. Rating agency Fitch has highlighted the level of retail investor cash flowing into the funds as a cause for concern. (See our June 9 "Link of the Day," "Fitch on China's MMFs.") FT adds, "The Chinese authorities should be more proactive, according to Mr. Pozen. "Do investors in China know what kind of fund they are getting into?" he asks. "Do they realise it is a fluctuating junk bond fund and not a safe money market fund? I bet a lot of people do not understand those risks." These funds need to be labelled properly, he adds, and the value of their underlying holdings needs to be "disclosed properly.""
