TEXT-Fitch:Institutional demand drives Chinese MMF concentration

(The following statement was released by the rating agency)

May 03 - Rising demand from institutional investors contributed to a further concentration of the market for Chinese money market funds (CMMFs) in Q112, Fitch Ratings says. But it also helped reduce the fund-flow volatility normally seen at the end of the first quarter. The increasing role played by institutional investors should bring more balance to the market in the longer term.

Market concentration among the largest 10 management companies in the CMMF sector rose to 72% (from 63% at end-2011) and assets at those companies rose about CNY38.2bn according to Fitch's calculations, while smaller managers on balance saw their assets under management decreasing.

We believe the increase in market concentration highlights the importance that institutional investors place on managers having the necessary experience, fixed-income resources and credit research capability. We highlighted the increasing importance of institutional investors to CMMFs in a February report available at www.fitchratings.com.

Although the overall number of funds remained unchanged in the quarter, three funds added B-class offerings which are designed to meet the needs of institutional investors. While CMMF assets in A-class offerings provided to retail investors shrank by more than CNY14bn to CNY 165.7bn, assets under management in B-class offerings rose almost CNY17bn to CNY 131.4bn according to Fitch's calculations.

This rise in demand from institutional investors helped the overall asset base for CMMFs to remain broadly stable in the first quarter. This is unusual for the generally volatile asset base of CMMFs, which is driven by the short investment horizon and a less systematic asset allocation approach of retail investors. This volatility is normally compounded by a seasonal product push towards year-end by managers, a practice increasingly scrutinised by the regulatory authority.

Further growth on the institutional side of the market should reduce volatility in the long term. However, if the investment climate for riskier assets such as equities continues to improve from the low levels at end-2011, there could be more redemptions from MMF investors and a return of higher volatility in the short term.