By Simon Miller

Chinese money market funds (CMMFs) are aiming towards institutional investors according to the latest report from Fitch Ratings.

However, despite the orientation away from retail, there had been no framework, such as short-term MMFs in Europe or prime MMFs in the US, for conservative liquidity funds in China.

As as result, the agency said CMMFs would benefit from greater product differentiation to "better reflect institutional investors' priority on liquidity and credit quality over the traditional focus on yield".

"CMMFs provide an effective tool for working capital management of eligible institutional investors, primarily domestic entities and multinational investors which are legally organised and operating in China as well as others eligible under the qualified foreign institutional investors' scheme," says Roger Schneider, senior director in Fitch's Fund and Asset Manager team.

Fitch expected an increasing proliferation of CMMFs targeting institutional investors and ongoing investments in high quality funds managed by seasoned specialist investment teams.

In addition, the agency noted that the evolving Chinese commercial paper market would add more choices for all CMMFs.

Fitch assigns its top rating 'AAAmmf(chn)' to funds with strong capacity to preserve capital and provide shareholder liquidity.

At end-2011 51 funds were established with CNY294.8bn (£29.6bn) of assets under management. However, the market is concentrated in 10 management companies, which control about 63% of total assets at end-2011.

"Volatility in CMMFs' assets under management is significant and presents a key challenge for liquidity management. However, the agency expects the growing share of institutional investors to stabilise the asset base in the long term," added Schneider.

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