The 7-day annualized yield of Tianhong Yu'ebao Money Market Fund has dropped below 0.9%, with recent data from May 7 showing it at 0.89%. The daily earnings per 10,000 units stand at 0.2416 yuan, meaning an investment of 10,000 yuan yields approximately 0.24 yuan per day.
Since May 2, the fund's 7-day annualized yield fell below 1% and has continued to decline, breaching the 0.9% mark. This level of return is now common among money market funds.
Looking back, the changes are stark. Yu'ebao reached a peak yield of 6.763% in 2014. Over the past 12 years, its yield has followed a steep downward trajectory, a curve that encapsulates the shifts in China's monetary landscape over more than a decade.
Money market funds primarily invest in assets such as interbank certificates of deposit, short-term government bonds, and bank deposits. The decline in yields from these assets is largely attributable to the central bank's accommodative monetary policy. Persistently low market interest rates have reduced returns on these assets, which subsequently affects money market funds.
However, in recent months, the central bank has significantly scaled back its reverse repo operations. In March, Medium-term Lending Facility (MLF) operations resulted in a net liquidity withdrawal of 850 billion yuan.
Regarding April's operations, on May 7, the central bank disclosed its liquidity management activities for the month. There was a net withdrawal of 200 billion yuan via the MLF, a net withdrawal of 7 billion yuan via the Standing Lending Facility (SLF), a net withdrawal of 200 billion yuan via the Pledged Supplementary Lending (PSL) facility, and a net injection of 366.7 billion yuan through other structural monetary policy tools.
In open market operations, April saw a net injection of 40 billion yuan from government bond transactions, a net withdrawal of 331.6 billion yuan via 7-day reverse repos, a net injection of 130 billion yuan from central treasury cash management, and a net withdrawal of 400 billion yuan from reverse repos of other maturities.
These figures indicate that the central bank's primary focus in April was on substantial liquidity absorption. Despite this, market interest rates have not shown a significant increase. The overnight pledged repo rate (DR001), a key indicator of interbank liquidity tightness, has been declining since March 16 from a high near 1.35%. From late March to early April, this rate experienced a notable drop and has since fluctuated within a low range of 1.22% to 1.24%. Although the rate briefly surged close to 1.32% ahead of the month-end on April 28, it fell back to around 1.26% by May 7 and dropped a further 3 basis points to 1.2430% on May 8. The 7-day repo rate (DR007) followed a similar pattern, declining by 3.59 basis points to 1.3365% on May 8.
Why have the central bank's liquidity-absorbing actions not led to a rebound in market rates but instead a continued decline? The reasoning points to excessive inflows of foreign capital, which may have loosened the central bank's grip on market conditions. Since last year, China's goods trade surplus has reached a record high, leading businesses to accumulate substantial foreign exchange holdings. Concurrently, the US dollar depreciated by approximately 10% throughout last year and has remained weak this year. Although the depreciation rate has moderated, the pace of the Renminbi's appreciation against the dollar has accelerated. This has led export-oriented companies to anticipate further dollar weakness, prompting them to convert foreign exchange proceeds into Renminbi on a large scale.
Data from the State Administration of Foreign Exchange shows that for the full year 2025, banks recorded cumulative foreign exchange settlement of $2,594.9 billion against sales of $2,398.3 billion, resulting in a surplus of $196.6 billion. Monthly trends in 2025 indicated phased fluctuations in this surplus: a consecutive seven-month surplus beginning in May signaled growing willingness to settle foreign exchange; the surplus peaked at $51 billion in September; it narrowed to $15.7 billion in November, reflecting market rebalancing; and expanded again to $100.1 billion in December due to year-end corporate settlement activities.
At the start of this year, data for March 2026 shows banks settled 1,888.9 billion yuan worth of foreign exchange and sold 1,778.6 billion yuan. For the first quarter of 2026, cumulative settlement reached 5,327.5 billion yuan against sales of 4,360.6 billion yuan. In US dollar terms, March settlement was $273.6 billion against sales of $257.6 billion. First-quarter cumulative settlement amounted to $766.4 billion against sales of $627.7 billion, resulting in a substantial surplus of $138.7 billion for the quarter.
A surplus in foreign exchange settlement means that after receiving foreign currency from customers, commercial banks must release the equivalent amount of Renminbi into the market at the prevailing exchange rate, which becomes customer deposits.
If a commercial bank lacks sufficient Renminbi deposits, it must sell the foreign exchange to the central bank. The central bank then injects base money into the market, which becomes customer deposits, inevitably creating ample market liquidity. Abundant liquidity, in turn, exerts downward pressure on market interest rates.
Although the central bank has been absorbing liquidity from the market over the past two months and observes the continued decline in rates, it has not taken more aggressive measures to push rates higher. It has even occasionally injected liquidity. This suggests that the current trajectory of market interest rates aligns with the central bank's preferences. From this perspective, it is accurate to say that the central bank's maintenance of loose liquidity conditions is contributing to lower market rates.
Comments