Bangkok--1 Mar--Moody's Investors Service
Moody's Investors Service says recent events affecting constant net asset value (CNAV) money market funds (MMFs) in China illustrate the vulnerabilities of such investment vehicles, which are sensitive to credit, interest rate and liquidity risks.
"These developments offer some indications as to how the funds -- first launched in China in December 2003 after legislation fashioned in line with US practices -- might be structured and managed in the future and are also instructive for the MMF community globally," says Henry Shilling, a Senior VP and one of the author's of a new Moody's report on the topic.
The just-released report -- entitled Liquidity Risk to CNAV Money Market Funds: Lessons From Recent Liquidity Squeeze Affecting China Money Market Funds --examines the impact of a major liquidity squeeze that occurred in China in mid-2006, the Chinese market's evolution, regulatory developments and the experience of other markets. It also looks at proposals for continued prudent management of MMFs in China.
"The issues discussed in the report are particularly relevant as CNAV money market funds are expanding in Europe and expected to grow in Asia in the coming years," says Shilling, who is based in New York.
In China, the rise in the size and number of MMFs has been such that they command a meaningful role in the Chinese asset management industry. As of March 2006, the assets under management (AUM) of 26 MMFs had reached RMB235.5 billion, or 54% of the total managed assets of China mutual funds.
Even after huge redemptions in June 2006 -- triggered by IPOs in China's equity market -- and the decline in the AUM of MMFs to RMB112 billion as of September 2006, the funds still account for 28% of total managed assets. At the same time, their number rose to 38. At year-end 2006, money funds had RMB 85.4 billion assets under management.
During 2006, some MMFs likely "broke the buck," a term referring to a situation when a fund's share price falls below $1 or 1 RMB due to mark-to-market value declines equal to or more than 0.5% of a fund's value based on amortized cost valuation.
To the extent that China-based CNAV MMFs continue to offer daily liquidity at constant share prices, the Moody's report says such investment vehicles require more judicious management practices.
Such outcomes could be achieved through a reduction of their risk profiles by entirely prohibiting the use of leverage; an elevation of credit quality guidelines; curtailment of a reliance on illiquid securities, to the extent possible; and a reduction in weighted average maturities (WAM) as well as final legal maturities.
In addition to Shilling, the report's other authors include Lilian Chen, an Analyst based in Taipei, and Christine Hung, an Associate Analyst, also based in Taipei.