Chinese investors are switching to the stock market from safe-haven money market funds (MMFs) as they bet on a speedy recovery and continued policy support for a pandemic-stricken economy.
Fund consultancy Z-Ben Advisors estimated that there were outflows of 1.23-2 trillion yuan ($175-285 billion) from China’s MMFs in the second quarter.
“A key driver (for the stock market rally) this time is retail investors aggressively redeeming from money market funds (MMFs) and redeploying the proceeds into newly-issued equity funds,” the consultancy noted in a report.
The outflows were in line with a sharp drop in the number of units in money market ETFs.
Hwabao Tianyi ETF, the largest money market ETF listed on the Shanghai Stock Exchange, saw its total units decrease by 22% to 714 million on July 13, from 913 million in April.
Fund managers are likely needed to sell securities in money market to deal with massive redemption, tightening liquidity and pushing up money market rates.
The switch could last for the long run, as investors now have few other options in terms of investments, said Fu Yanping, an analyst with China Galaxy Securities. Fu added that properties are not attractive, while defaults in trusts and banks’ wealth management products also help keep investors away.
The switch occurred alongside a sharp rally in China’s A-share market as investors primed for Beijing’s continued spending and other reforms aimed at offsetting the impact of the coronavirus outbreak.
China’s blue-chip index and the Shanghai composite index rose 13% each in the second quarter. The tech-heavy start-up index outperformed with a 30% rise in the second quarter, as Beijing pushed forward with registration-based IPO reforms for the Shenzhen board.
By comparison, the seven-day annualized returns offered by most Chinese MMFs are around 2%.
The retail investor frenzy has also seen demand rise for funds that invest in the stock market, with new funds able to raise billions of yuan in a matter of hours and, in some cases, even suspending subscriptions in order to limit the fund size.