Chinese Money Market Funds ‘Face Lack of T-Bill Issuance’
Fitch Rating’s said that a sharp decline in T-bill issuance by the People Bank of China (PBOC) and in instruments issued by the Ministry of Finance is making it difficult for rated Chinese money market funds (CMMFs) to maintain a minimum level of T-bill exposures, as per the credit ratings agency’s (CRA) criteria.
However, Fitch is of the view that the funds can maintain their overall credit quality and liquidity profile by substituting T-bills with exchange traded repos or interbank repos with highly rated institutions and which are backed by high quality collateral.
Fitch expects rated CMMFs to invest certain amounts into direct government obligations to ensure that their liquidity and credit quality are consistent with their National AAAmmf(chn) ratings. At this rating level the CRA typically, as per its national MMF rating criteria, expects more than 50% of rated funds’ portfolios to consist of securities issued by governments or by issuers considered systemically important. Of this, at least a third should consist of direct government obligations, This in turn means that at least 16.7% of CMMFs should be held in T-bills issued by PBOC or related short-term instruments issued by the Ministry of Finance.
Fitch notes that the PBOC has not issued new T-bills in 2012 as it focuses its monetary policy on open market operations in the interbank repo market. No announcements have yet been made as to whether issuance resume in 2013. If there is no further issuance, the amount of outstanding T-bills will decline to less than 10 trillion yuan renminbi (CNY) in May 2013 and to zero in October 2014 from about CNY14trillion at end-September 2012.
Fitch allows AAAmmf(chn)-rated CMMFs to deviate from this criteria until the PBOC resumes issuance, provided that their T-bills exposure is substituted by instruments with credit quality similar to that of the sovereign while maintaining comparable market liquidity. Fitch also takes into account other considerations as highlighted in a special report, ‘Assessing Chinese Money Market Funds’, dated 6 March 2012. These include the overall liquidity profile of rated funds, as measured by the proportion of cash and overnight assets, and the portfolio’s maturity distribution. Currently, such factors are sufficient to support the CMMFs at their AAAmmf(chn) ratings.
Fitch currently views stock exchange traded reverse repo transactions on the Shanghai and Shenzhen Stock exchange as similar in their credit profile to the sovereign itself. They are also traded on overnight basis or have very short tenors to balance CMMFs liquidity requirements.
Fitch also views a moderate and diversified exposure to interbank repos as consistent with a AAAmmf(chn) rating, provided counterparties are rated A- or above and transactions collateralised with high quality assets such as AAA government paper.