World's No.1 Money Fund Said to Face Pressure to Cut Inflows

(Bloomberg) -- China’s central bank is urging Alibaba Group Holding Ltd.’s financial affiliate to reduce the maximum amount individuals can invest in its Yu’E Bao money-market fund to limit risks to financial markets, people with knowledge of the matter said.

Yu’E Bao, the world’s largest money-market fund, will cut its current 1 million yuan ($145,000) investment cap by more than half after receiving input from the People’s Bank of China, according to the people, who asked not to be identified discussing sensitive information. The limit may be imposed as soon as this month and will apply to new money inflows, they said.

Owned by Alibaba’s Ant Financial affiliate, Yu’E Bao has since its launch about four years ago lured about 325 million Chinese investors, almost the entire population of the U.S., as it offered higher returns than bank deposits. The fund’s assets grew to 1.14 trillion yuan by March, topping the size of the JPMorgan U.S. Government Money Market Fund.

Yu’E Bao’s size has spurred concerns about its influence over the nation’s interbank market, where most of its money is invested, and where borrowing costs have soared to a two-year high amid the government’s renewed campaign against leverage. Moody’s Investors Service said in a note last week that Yu’E Bao has been putting more money into longer-maturity assets and liquidity risks will increase if that trend continues.

The PBOC couldn’t immediately comment.

A representative for Tianhong Asset Management Co., which is majority owned by Ant Financial and manages Yu’E Bao funds, said in a text message that transfers by customers into their Yu’E Bao accounts were currently normal, without commenting further. Ant Financial didn’t immediately return an email seeking comment.

“An oversized fund carries significant systemic risks,” said Shi Lei, Beijing-based head of fixed-income research at Ping An Securities Co., adding that regulators were tightening oversight after big redemptions at some money-market funds last year.

Riskier Banks

Yu’E Bao -- which means “leftover treasure” -- was made available through Ant Financial’s Alipay platform with no minimum investment or time frame, and can be used to make credit-card payments and buy products. About 99.7 percent of Yu’E Bao investors are individuals, according to its annual report, rather than companies or financial intermediaries, as is typically the case at other Chinese money-market funds.

Moody’s expressed concern about Yu’E Bao’s increased holdings of interbank negotiable certificates of deposit, which more than doubled in the first quarter, and included NCDs issued by China’s smaller and riskier banks.

The fund has benefited from a government deleveraging drive that drove up borrowing costs and money-market fund returns. The average seven-day return for Yu’E Bao’s investors was recently an annualized 4.02 percent, versus 2.52 percent at the end of November, data from Tianhong’s website show.

America’s recent experience with money-market fund regulation suggests any tightening move on Yu’E Bao could lead to unintended consequences. A U.S. overhaul of the industry in October -- meant to make money funds safer and more transparent in the wake of the 2008 financial crisis -- sparked a $1 trillion exodus from “prime” money funds that buy certificates of deposit and short-term company IOUs. The outflows helped boost commercial paper rates to the highest level since the financial crisis and forced borrowers to search for alternative sources of funding.

Ant Financial, formally known as Zhejiang Ant Small & Micro Financial Services Group, is controlled by billionaire Alibaba founder Jack Ma. The firm’s spectacular evolution from an outsider in a tightly controlled industry to an online finance giant that operates Yu’E Bao as well as AliPay, China’s biggest internet payment service, has attracted scrutiny from the PBOC previously.

--With assistance from Ling Zeng and Michael Patterson

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net, Heng Xie in Beijing at hxie34@bloomberg.net, Helen Sun in Shanghai at hsun30@bloomberg.net.

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Paul Panckhurst, Darren Boey

With assistance from Jun Luo, Heng Xie, Helen Sun