Headquarters of Alipay, an Ant Financial subsidary; Hangzhou, China. Photo by Wikimedia Commons user David290.
In investing, my colleagues and I often warn our clients not to be led astray by a herd mentality. But in China, investors seem to have decided that hundreds of millions of their neighbors can’t all be wrong.
By the end of 2018, 588 million investors were participating in the world’s biggest money market fund. The fund – Tianhong Yu’e Bao – is administered by Ant Financial Services Group and has grown to manage 1.13 trillion yuan ($168.37 billion) in assets as of the end of last year. More than a third of China’s population has invested some amount of money in this single fund. Many of the investors live in rural areas and have invested relatively small amounts.
As a financial professional, I would hate to be running this fund. If this fund should ever fail, it would be a massive disaster, and the fund’s managers surely know as much. In America we have had issues with banks that are considered too big to fail. I’d say this fund is just too big, period.
Ant Financial started this particular money market fund in 2013, and it became the world’s largest four years later. Its quick rise was due to a variety of factors. Users of Ant Financial’s Alipay, a service that allows users to pay for goods and services with their mobile phones, could invest spare cash for short periods, allowing investors to dip in and out of the fund easily. And the fund’s annualized yield, recently reported at 2.306%, has consistently outpaced short-term deposit rates at Chinese banks.
Chinese regulators eventually grew alarmed as the fund ballooned in size. As a result of regulatory pressure, Ant Financial’s subsidiary Tianhong Asset Management – which manages the fund – took steps to attempt to shrink it, including limiting asset inflows and reducing holdings of assets that might prove hard to sell. Alipay also started offering alternative money market funds, a move which has drawn some assets elsewhere. These steps were successful enough that the fund manager recently lifted investment caps that had previously restricted individuals to investing no more than 100,000 yuan (about $14,900) in the fund overall. Daily investments were also capped, at 20,000 yuan ($2,980).
The fund’s total assets have shrunk steadily since March 2018, according to The Wall Street Journal. But it is still massive. And Ant Financial continues to thrive. According to CB Insights, the company accounted for 35% of global venture capital investment in financial technologies firms in 2018. Alipay has more than 700 million active users and Ant Financial is valued at $150 billion overall. While its flagship money market fund has slightly diminished over the past year, Ant’s overall assets under management have continued growing.
Ant Financial and its massive money market fund are together a useful reminder for American investors that there are still good reasons to be wary of China. Back in 2014, I wrote that our firm “remain[s] wary of the risks of investing in a place that does not always respect the rule of law or the principles of corporate governance that we take for granted in the United States.” At the time, I was writing about e-commerce firm Alibaba – which, like Ant Financial, was founded by entrepreneur Jack Ma.
Both Alibaba and Ant Financial, like China’s economy more broadly, have made huge gains in the past decades. But China’s economic and regulatory environment remains opaque, shaped by direct government interference and sharing inherently unreliable or incomplete data.
There are no immediate indications that anything will go wrong with Tianhong Yu’e Bao or Ant Financial. But with more than one-third of China invested in a single fund, the consequences of an unforeseen problem would be truly massive. Let’s hope, for the sake of 588 million investors, that we never find out just how big the fund’s fall could be.