Watch out for the Chinese Whale



china flagThe world’s largest money fund could pose a risk to financial markets according to a recent report from Bloomberg. China’s central bank has urged Alibaba Group Holding Ltd.’s financial affiliate to reduce the maximum amount individuals can invest in its Yu’E Bao money market fund. Right now, investors must have one million yuan or US$145,000 to get in — a figure that’s set to be cut in half this month based on input from the People’s Bank of China.

Yu’E Bao, which is owned by Ant Financial, has 325 million Chinese investors — the equivalent of the entire population of the U.S.

Its returns are higher than bank deposits — that’s  driven the fund’s assets to 1.14 trillion yuan as of the end of March. It also makes the fund bigger than that other famous whale: JP Morgan U.S. Government Money Market Fund.

Why does size matter in the case of this fund?

china-chart-may-17Concerns are rising about its growing influence over China’s interbank market, where most of the fund’s money is invested — and where borrowing costs have risen sharply as the government renews its campaign against leverage. Moody’s Investor Services raised a flag last week when said that Yu’E Bao has been putting more money into longer-maturity assets, which could boost liquidity risks.