Assets Scarce or Panicking?

The Tianhong Yuebao money market fund has recently seen its seven-day annualized yield dip to 1.477%. This is noteworthy as it has slipped below the 1.5% mark for the first time since December 20, 2022. When a once popular investment tool experiences a decline, it raises alarms about broader financial trends.

Introduced in May 2013, Tianhong Yuebao quickly transformed how money market funds operate, integrating seamlessly with the Alipay app and gaining immense popularity. By the end of that same year, the fund's value surpassed a staggering 1.8 trillion yuan (approximately $280 billion USD). Its peak came in the first quarter of 2018 when it reached an unprecedented 16.9 trillion yuan (approximately $2.5 trillion USD). However, influenced by a shift in market dynamics as Yuebao began to connect with other money market funds, its total size has steadily declined, settling at around 7.495 trillion yuan as of the first quarter of this year.

Tianhong Yuebao primarily invests in short-duration government bonds, financial bonds, high-grade corporate bonds, and various deposit vehicles. These assets are closely linked to the central bank's monetary policy and liquidity conditions in interbank markets. The recent decline in yield serves as a barometer, indicating that if Yuebao is struggling with lower returns, many other investment products are likely following suit.

The underlying principle of wealth management products like Yuebao is relatively straightforward: they typically involve a mix of money market funds. For instance, they may invest in a diverse range of bonds with various maturities, including those with terms of one month, three months, six months, one year, three years, five years, and even ten years. This wide-ranging strategy aims to balance immediate liquidity needs with the desire for higher yields.

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The complexity of these financial instruments comes from the necessity to achieve two primary goals. First, they must provide attractive yields; otherwise, investors will look elsewhere. Second, they need to ensure liquidity so that clients can withdraw their investments at will. Thus, long-term bonds serve to boost the overall yield, while shorter-term bonds cater to the daily redemptions from investors.

Currently, a pressing issue is the drastically diminished returns from these long-term bonds. For example, the ten-year government bond yield is a mere 2.3%, while analysts suggest that a reasonable return should be around 2.5%. This scant yield raises fundamental questions: if one holds a ten-year bond yielding only 2.3%, how could a few months' investment in a wealth management product offer greater returns?

The decline in long-term bond yields can be attributed to increased risks within the market. As noted in previous discussions, the central bank has actively sold government bonds, creating a ripple effect. When large sums pour into the long-term bond market, it inflates prices artificially, yet the actual returns remain static upon maturity, leading to a significant decline in yield over time.

This phenomenon helps to explain the broader deterioration in the yields of many wealth management products. With long-term bonds failing to generate sufficient returns, people are increasingly lamenting an "asset drought."

However, a closer examination reveals a more nuanced reality. Has money truly shifted to the stock market? The first half of this year saw substantial declines in stock indices, and trading volumes dropped dramatically. A total transaction value of 100.94 trillion yuan (around $14 trillion USD) in A-shares represented a 10.20% decrease year-on-year.

Is there a migration to the primary market for initial public offerings (IPOs)? Current conditions suggest a tightening environment; fewer private placements and exit routes are available to investors.

What about real estate? The property sector has also experienced a notable downturn, with transaction volumes shrinking significantly this year.

Yet, amidst these seemingly bleak market conditions, there is evidence of investment in the money market fund sector. Data released by the Asset Management Association of China at the end of May revealed that the total assets of public funds reached an all-time high of 31.24 trillion yuan, with money market funds playing a pivotal role in this growth. By the end of May, the size of money market funds stood at 13.67 trillion yuan, illustrating a month-on-month increase of 235.2 billion yuan.

In the bond market, transactions flourished in the first half of the year, with a volume exceeding 216.99 trillion yuan, marking a significant year-on-year growth of 14.48%. Government bonds accounted for 35.66% of the total market, and their turnover saw an impressive 18.89% rise, indicating robust activity and investor confidence in this sector.

Several industry experts predict that the first half of 2024 could potentially experience one of the most significant bull markets for bonds. The downtrend in yields—spanning from government securities to high-yield corporate bonds—could reach historical lows, making it a time of opportunity for both individual and institutional investors.

This suggests that, relative to other asset classes, some liquidity has indeed transitioned to the bond market, propelling a bullish trend.

It's essential to recognize that bonds by nature offer limited growth, relying strictly on fixed interest payments. In contrast, well-managed companies that demonstrate operational profit improvements often yield long-term value appreciation in addition to their cash dividends. Over the past decade, from 2014 to 2024, dividends from large corporations have reached their highest levels in over ten years. Historically, government bond yields outstripped corporate dividends, yet the tables have turned; corporate dividends now surpass government bond interest rates.

China boasts numerous outstanding companies with growing profits and increasing dividends. Observers can see this potential, yet many seem unwilling to acknowledge it. The true issue isn't scarcity of valuable assets but rather a prevailing sense of caution among investors. Many prefer to flock toward the safety of low-yield deposits or bonds due to a deep-seated aversion to risk.

This inclination toward conservatism isn't driven by the types of assets people own but by their behaviors in engaging with financial markets. The act of passing around a “hot potato” investment—even if it is a bond—is inherently risky. Conversely, those with cash dividends and substantial returns have tangible value. Finding the right investment opportunities can alleviate fears and instill confidence in the market, ultimately leading to more prosperous financial outcomes.