CICC has released a research report highlighting the challenges faced by money funds in the era of low interest rates. Recently, the four major banks have lowered deposit interest rates, with the one – year fixed deposit rate dropping below 1%. Additionally, the reduction of the 7 – day repo rate has led to the 7 – day annualized yield of money market funds approaching 1%. This environment is expected to persist until money market interest rates complete their supplementary reduction, with inflation remaining low and real interest rates rising. This scenario is still beneficial for the overall scale of low – risk assets such as money market funds. However, once a significant catch – up reduction in money market interest rates occurs, it may marginally push funds out of money market funds.
Historical Context and International Comparisons
United States
CICC’s analysis of historical data shows that the US has experienced three periods when the yield of money market funds entered the “1%” era: 2003 – 2004, 2009 – 2017, and 2020 – 2021. During these interest rate cut cycles, the growth of money market fund (MMF) scales in the US either slowed down or showed a significant decline. This pattern is attributed to the high beta value of MMF yields, which means that during interest rate decline cycles, MMF yields often drop faster than deposit yields, leading to capital outflows from MMFs.
Eurozone
In the Eurozone, the yield of money market funds entered the “1%” phase between the third quarter of 2009 and the fourth quarter of 2022. This period can be divided into two sub – periods by mid – 2014: positive and negative interest rates. During the positive interest rate period, the decline in interest rates to the 1% stage led to a significant drop in the size of money funds. In contrast, during the negative interest rate period, the scale of money market funds did not shrink further but tended to rise. This was due to the subscription demand from institutional investors, driven by lower bank deposit interest rates compared to the yields of money market funds.
Japan
Japan’s experience with negative interest rates led to the demise of MMFs, while money – related funds (MRFs) linked to securities accounts dominated due to policy protection from the cost of negative interest rates.
Drivers of Changes in MMF Scales
CICC identifies three main reasons for the changes in the scale of money market funds:
Beta Variation: The beta value varies due to the different elasticity of nominal interest rates to changes in policy interest rates.
Regional Interest Rate Systems: The implementation of negative interest rates by the European Central Bank and the Bank of Japan has led to different situations for MMFs.
Inflation Impact: The impact of inflation on real interest rates leads to different market demands for low – risk assets.
Responses to Low – Interest – Rate Challenges
Overseas Experience
CICC notes that central bank interest rate cut cycles often pose challenges for MMF managers. To address these challenges, overseas MMF managers have adopted several response plans:
Fee Reduction: Lowering fees to attract investors.
Credit Exploration: Exploring credit opportunities on the asset side.
Liquidity or ESG Premium: Offering liquidity or ESG – related premiums.
Product Ecosystem Construction: Building a comprehensive product ecosystem.
Increasing Overseas Investment: Expanding investment horizons to overseas markets.
For regulatory authorities, one response to mitigate the impact of low interest rates on the MMF industry is to promote the valuation transformation of MMFs from the amortized cost method to the market capitalization method.
China’s Unique Situation
China’s interest rate transmission system is a dual – track system, comprising both deposit and loan interest rates and money market interest rates. The beta values of money market interest rates and deposit interest rates are influenced by both market and policy interest rates. Before 2023, money market rates were more flexible compared to the 7 – day repo policy rate. However, since 2023, frequent cuts in deposit rates by the deposit self – discipline mechanism have led to higher deposit rate beta values than money market rates.
In years when the beta value of money market interest rates was higher (before 2023), the central bank’s monetary policy cycle significantly impacted the industry size of MMFs. After 2023, deposit interest rates dropped more rapidly, yet the scale of MMFs continued to grow at a high rate. This is attributed to the dual – track system, which allows the People’s Bank of China to precisely regulate various interest rates.
Future Outlook for China’s MMFs
CICC expects a significant reduction in money market interest rates in the future. While this will be bearish for MMFs, causing the growth of their scale to slow down or even decrease, the likelihood of money market interest rates falling into the negative range is very low. Even if rates are cut, they are unlikely to fall far below the demand deposit interest rates of major banks. Therefore, it is expected that MMFs in China will most likely continue to exist.
Strategic Recommendations for MMF Managers
To meet the challenges posed by low interest rates, CICC recommends that MMF managers take the following steps:
Build a Robust Client Ecosystem: Enhance client stickiness by building a strong client ecosystem.
Prepare for Fee Reductions: Be prepared to reduce fees and offer benefits to clients.
Strengthen Investment Research Capabilities: Enhance the company’s investment research capabilities to better navigate the low – interest – rate environment.
By adopting these strategies, MMF managers can better position their funds to withstand the pressures of low interest rates and maintain their attractiveness to investors.
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