Growth from institutional investors surpassed retail investors and represented 63% of money fund assets at the end of 2015, Li Huang, associate director, fund and asset manager rating group of Fitch said.
Money market funds, which mainly invest in short-term debt securities, have become popular in China as they offer higher interest rates than retail bank deposits, she told FSA.
MMF yields have been declining since the beginning of 2014 when the market average seven-day yield peaked well above 5%, according to Fitch.
In June, the average yield was down to 2.4%, which is in line with the overall fall in interest rates and still attractive compared with the current bank deposit rate of 0.3%. Chinese MMFs still provide positive real yield, but the gap between the yield and the consumer price index is narrowing, the agency said.
Chinese MMFs expanded with unprecedented speed in 2015, with total money market fund assets reaching a record RMB4.6trn ($689bn) at the end of the year. As of 30 June, MMFs were the largest asset type (55%) in the Chinese mutual fund industry, followed by balanced fund (25%), bond fund (12%) and equity fund (8%), Li said.
"These institutional investors’ re-allocations could lead to large and sudden outflows"
“The substantial increase in the institutional demand for MMFs in 2015 is not something ordinary in China, as the market was previously dominated by retail investors,” Li said.
Retail demand, especially for e-commerce MMFs, triggered the rapid expansion of the Chinese money market funds from the middle of 2013 until the middle of 2015, when institutional demand surged, she said.
“The extreme volatility of the Chinese stock market in June 2015 and the IPO suspension shortly after caused a change. Capital originally reserved for IPO equities rushed into MMFs to wait for the re-launch of IPO and other investment opportunities. These inflows mainly came from institutional investors, which included banks, insurance companies, security firms and asset managers.
"These institutional investors’ reallocations could lead to large and sudden outflows,” she said.
Li said she has already seen some outflows, as the MMF market consolidated to RMB4.4trn as of the end of June from RMB4.6trn at the end of 2015.
"More outflows are expected following the sharp increase within a year," Li said.
China has become the second largest money market fund domicile after the US, representing 13% of the global market at the end of June, compared to 2% at the start of 2013, the firm said.