China's asset management industry has had explosive growth in the last two years following the arrival of online money market funds, which have transformed the way millions of Chinese invest their savings.
The booming popularity of money funds, however, has led several investment experts to raise serious concerns about risks developing in the industry as a result.
The funds' appeal is strong given that most of them offer annual returns of 4-6 percent, compared with the 3 percent Chinese individuals receive on their bank deposits. The returns have helped money market funds' assets under management grow nearly 15-fold in the past four years to 1.9 trillion yuan ($306 billion) at the end of 2014, according to Goldman Sachs Asset Management.
Robert Pozen, senior lecturer at Harvard Business School and former chairman of MFS Investment Management, the oldest U.S. mutual fund company, fears investors are being drawn to the high interest rates without any understanding of the risks.
The funds offer high interest rates, he says, but "they are not explaining that in many cases this type of paper is not top quality. This is essentially what we would call primary junk funds in the U.S. — paper that's usually below investment grade, fluctuates daily in terms of interest rates and from time to time defaults.
"The big risk is selling to relatively unsophisticated investors over the internet who probably do not know what they are getting into. There is a real possibility of loss here."
The biggest winners from the influx of cash into online money funds have been large Chinese internet companies like Alibaba, Tencent and Baidu. They were quick to recognise that selling money funds over the internet to consumers who were comfortable with online transactions could translate into big business.