In the past couple of years, the asset management industry of China has grown by leaps and bounds. Thanks to online money market funds, millions of Chinese people have been able to invest their savings in a completely different way altogether. However, with money funds becoming more and more popular, many investment experts have begun to raise questions about whether the industry is at a risk or not.
Given the fact that most of the funds offer strong annual returns of anywhere between 4 and 6 percent, as compared to the 3 percent that the average Chinese gets on bank deposits, the funds are very popular.
In the past four years, these money funds have helped the asset management industry grow almost fifteen times. According to Goldman Sachs Asset Management, the industry stood at $306 billion at the end of 2014. However, not all that glitters is gold. Robert Pozen, a senior lecturer at the Harvard Business School says that many investors will be drawn to the funds without having a proper understanding of the risks involved. This could lead to some serious problems.
He says that while the funds offer better returns, they are essentially similar to junk funds in the United States. This essentially means paper that is ranked below the investment grade.
These funds fluctuate regularly in terms of their interest rates and also tend to default from time to time. Companies such as Alibaba, Baidu and Tencent Mobile are easily the biggest winners of the explosion in the Chinese money market.
Rating agency Fitch has underlined that the amount of retail level cash that is currently being put in the funds is a serious cause for concern. Since they don’t know what they are getting in to, periods of stress could eventually lead to a lot of money being withdrawn from the market.
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