China central bank driving rates higher sparks boom in money-market ETFs

Investors in China are ploughing cash into exchange-traded funds that track short-term government debt and deposit rates, as steps by the central bank push yields higher.Buyers pumped $2.8bn into money market ETFs in April, the most since September 2015, according to data compiled by Bloomberg.“China tightened policy, giving better rates for these money market ETFs compared to before,” said David Quah, head of ETFs at Mirae Asset Global Investments, a unit of Mirae Asset Financial Group. “There may be more inflows into RMB money and bond markets in the future as the central government is encouraging foreigners to invest in the mainland again through initiatives such as the bond connect.”The People’s Bank of China (PBoC) faces a delicate balancing act between driving money rates higher to reduce leverage in the financial system and preventing a cash crunch. Policy makers have already raised the cost of reverse-repurchase agreements twice this year, while benchmark interest rates have been on hold since 2015. The seven-day repo rate climbed to 3.1818% on April 28, the highest level in two years.An increase in assets is also due to “a flight to safety” as lower-grade bonds from entities in provinces like Liaoning in China’s northeastern rust belt start to default, according to Quah. “Beijing wants to let people feel that investing in bonds isn’t risk-free so lower-grade bonds fail while government bonds in money market funds are safer, especially as they are shorter dated.”While money market ETFs have seen a recent resurgence, internet funds like Alibaba Group Holding’s financial affiliate Yu’E Bao - which translates as “leftover treasure” - continue to outpace the popularity of their ETF equivalents. The Yu’E Bao fund saw assets rise 41% to a record 1.14tn yuan ($165bn) in the first quarter, according to the latest data provided by the firm.“In the second quarter, monetary policy will continue to be tightened with the aim to prevent financial risks and curb the property bubble,” said Wang Dengfeng, who manages the Yu’E Bao fund at Tianhong Asset Management Co “We will continue to seize long-term opportunities that also offer the opportunity for risk control so that we can create ideal earnings for our holders.”The annualised yield on the country’s biggest money-market ETF, the Fortune SG Tianyi Money Market Fund, rose to 3.6% at the end of April from 3.4% on March 1, according to the fund’s website. By comparison, Yu’E Bao pays about 3.99% per year, according to its website.“Many investors have moved their money to online shopping sites such as Taobao’s fund linked to Alipay, which is much more convenient for them to move money in and out for their online shopping needs and offer better rates than listed money market ETFs,” said Quah.