US dollar’s comeback knocks stocks in Indonesia as foreign investors flee
THE world’s largest money-market fund has too much cash to manage.
Billionaire Jack Ma’s Ant Financial Services Group on Thursday said it would offer two additional money-market funds to customers who have been parking their spare cash in its hugely popular online fund, the latest attempt by the company to limit flows into the giant fund.
The fund known as Tianhong Yu’e Bao, which a unit of Ant created in 2013, had US$266bil in assets under management as of March 31, after nearly doubling in size last year. The yuan-denominated fund is more than twice the size of the largest US dollar money-market fund and has roughly the same amount of assets as the SPDR S&P 500 ETF, SPY5 1.05% the world’s oldest and largest exchange-traded fund.
Ant, a sprawling financial company controlled by Ma that owns popular payments network Alipay, said starting yesterday it will add two funds managed by third-party asset management firms to its Yu’e Bao platform, whose name stands for “leftover treasure”. The change would give hundreds of millions of Alipay users the option to invest their money in alternative high-yielding money-market funds.
Yu’e Bao’s rapid growth has been fueled by hundreds of millions of individuals that use Alipay to make payments on everything from online shopping purchases to movie tickets and utility bills and who want to earn returns from their idle funds. The fund’s early popularity was a product of long-suppressed bank interest rates in China, but in recent years as deposit rates have been liberalised to some extent, it has become a convenient vehicle for people to park their money.
The fund’s massive size, however, has drawn scrutiny from regulators who have labeled it as systemically significant. The fund has drawn a flood of money by offering generous yields, which were recently 3.96% on an annualised basis, well above interest rates on bank deposits. Like other Chinese money-market funds, it invests primarily in certificates of deposit issued by Chinese banks, shortterm government securities and commercial paper.
Under pressure from Chinese authorities, Tianhong Asset Management, which oversees the Yu’e Bao fund’s investments, has taken multiple steps over the past year to slow its growth and limit inflows. Ant’s latest plan to offer other money-market fund options to Alipay customers indicates that money continues to flow in. Yu’e Bao’s assets increased by 6.9% in the first quarter of 2018, according to the company.
Ant said in a statement that individuals can invest in two money-market funds managed by Bosera Asset Management Co. and Zhong Ou Asset Management Co., two relatively well-known Chinese fund managers that aren’t affiliated with it. Bosera’s fund was set up in 2004, has US$496mil in assets and seven-day annualized yield of 4%. Zhong Ou’s fund, which has been around since 2015, has US$765mil under management and a seven-day annualized yield of 4.45%. There will be no limits on what individuals can invest in the two funds.
Tianhong’s Yu’e Bao fund will continue to impose daily and aggregate investment limits, said Le Shen, a spokesman for Ant. The fund currently has more than 400 million investors, and the new offerings will help “manage the pace of its growth,” he added.
In essence, Ant is partnering with companies that are rivals to its Tianhong unit. “The addition of these new money-market funds to Yu’e Bao is in line with Ant Financial’s commitment to using technology to make financial services more inclusive, and to working closely with traditional financial institutions,” Guoming Zu, vice-president of Ant Financial’s Wealth Management Business Group, said in a statement.
Diverting investor money into alternative funds will help “reduce concentration risks” at the Tianhong Yu’e Bao fund, said George Xu, an analyst at Moody’s Investors Service, adding it would limit potential liquidity risk to China’s financial system. Regulators worry about the possibility of large-scale investor withdrawals from the giant money-market fund, which could have trouble returning cash if it can’t easily cash out of illiquid assets it holds. Still, Xu said it isn’t a given that investors will choose the other funds over Ant’s own offering.
Assets in China’s money-market funds have swelled in recent years, led by Yu’e Bao’s expansion, but in March they dipped slightly to US$1.15 trillion at month’s end from US$1.23 trillion at the end of February, according to the Asset Management Association of China. The drop came after financial regulators last October tightened rules for fund managers, requiring them to hold more liquid assets that would lower their investment yields.
Steps that Ant’s unit Tianhong has taken to limit the large fund’s growth include imposing limits on how much individuals can park in the fund and setting aggregate quotas on the total amount of daily inflows. Those measures have helped slow the fund’s expansion significantly since late last year. ONE of the biggest casualties of the rising dollar is the emerging market of Indonesia, which is seeing heavy stocks selling by foreign investors.
On Thursday, the country’s equities benchmark logged its third drop of at least 2.4% since the middle of last week.
The JSX Composite Index slumped 6.6% last week – the most of any major index globally, according to FactSet, and its worst week since August 2013. Foreign investors pulled almost US$400mil from equities. Sales in stocks of the country’s biggest banks led the selling. The two largest both saw declines of nearly 15%.
Financials weren’t alone. Bumi Resources, one of Indonesia’s biggest coal miners, skidded 14% last week. But, highlighting recent volatility, the stock surged 16% Wednesday, and then fell 5% Thursday.
Selling has focused more on the market’s most-liquid stocks rather than on sectors, said Felix Lam, a senior portfolio manager for APAC equities at BNP Paribas Asset Management.
Indonesia has long been one of the most sensitive emerging markets to changing U.S. financial conditions given some 40% of the country’s bonds are owned by foreign investors, noted Frank Benzimra, head of Asia equity strategy at Société Générale .
Bonds fared poorly as the rupiah sold off in mid-April. The yield on Indonesian 10-year government debt climbed to 7.2% from about 6.6% in barely a week; it has since pulled back to 7%.
“The hunt for high yields makes the bond market attractive to foreign investors, but also makes it susceptible to periods of sharp outflows when financial conditions become less conducive,” said Benzimra. “This, in turn, is reflected in movements in equities and FX.”
Last month, the 10-year US Treasury yield itself briefly topped 3% for the first time since January 2014. Worries about the U.S. Federal Reserve accelerating the pace of interest-rate increases has also been causing jitters.
That helped weaken the rupiah as the dollar climbed to 2018 highs. On Wednesday, the dollar briefly topped 14,000 rupiah for the first time since January 2016.
Calling for calm, Indonesia’s central bank staged a “sizable” intervention in the currency and bond markets last week, saying it would remain in the market indefinitely.
The market tumult has raised the prospect of Bank Indonesia boosting interest rates sooner than expected. It could encourage some capital to stay in the country. DBS Bank and ING predict a rise may come in the next several months when previous consensus forecasts were for no action this year.
The market worries come after the JSX index hit record highs in 2017, rising 20%.