OREANDA-NEWS. Fitch Ratings has affirmed five Chinese money market funds at 'AAAmmf(chn)', following a review of the sector.

The funds are:
-- CIFM Cash Liquidity Fund
-- CIFM Money Market Fund
-- Gao Hua Sheng Yu Money Market Collective Investment Scheme
-- Harvest Prime Liquidity Money Market Fund
-- HSBC Jintrust Money Market Fund

The asset manager of Gao Hua Sheng Yu Money Market Collective Investment Scheme plans to close this fund in 2016. Fitch expects therefore to withdraw the rating of the fund when it winds down or closes.

KEY RATING DRIVERS
The 'AAAmmf(chn)' rating reflects
-- The portfolios' overall credit quality
-- Short-maturity profiles commensurate with the funds' investor base
-- Low exposure to interest rate and spread risks
-- The capabilities and resources of the respective investment manager

The 'AAAmmf(chn)' National Money Market Fund Rating reflects the funds' strong capacity to achieve the investment objective of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risk, relative to all other short-term investments in China.

PORTFOLIOS' CREDIT QUALITY/DIVERSIFICATION
In line with Fitch's National Scale Money Market Fund Rating Criteria and the requirements for a 'AAAmmf(chn)' rating, the funds seek to maintain a high credit quality by investing exclusively in securities/counterparties with a minimum international foreign-currency rating of 'A-' by Fitch, or of comparable credit quality rated by other global credit rating agencies. The funds also control concentration risk by setting adequate limits on their exposures to individual issuers and counterparties.

The portfolios are almost entirely, directly or indirectly exposed to the Chinese sovereign's credit risk. The funds' investment universe comprises exchange-traded or interbank repurchase agreements, certificate of deposits, Chinese sovereign bills and policy bank bonds. They invest to varying degrees in negotiated callable time deposits with large state-owned commercial banks. Fitch takes into account the final maturity of such deposits - as opposed to their call date - in its assessment of the portfolios' liquidity and average maturities. Investments in securities issued by non-financial corporates are maintained at low levels or avoided altogether.

As of end-November 2015, exchange-traded repos account for a large part of the portfolios' allocation, followed by government agency debts and time deposits. The exchange-traded repos typically have a maturity below 28 days and are collateralised according to the standards set by the Shanghai stock exchange. The government-owned exchange, the funds' counterparty, is viewed by Fitch as having high credit quality. The collaterals used in repos and the haircuts are defined by China Securities Depository and Clearing Co., Ltd (CSDC) and updated on a daily basis.

Interbank repos use a market standard master contract provided by China Central Depository & Clearing Co., Ltd and the conditions on collateral and haircuts are negotiated on bilateral basis.

The funds' cash is held at their respective custodian banks (all rated A/Stable/F1 by Fitch). Cash held at the custodian bank is legally and operationally ring-fenced from other bank creditors. CIFM Cash Liquidity Fund and HSBC Jintrust Money Market Fund have held large balances of non-invested cash with their custodian banks (28% and 18% of assets on average, respectively, during the 12 months and 10 months to the beginning of December 2015). Fitch considers these exposures high; however, the risk is mitigated by the uninvested cash being held at the custodian banks, rather than direct counterparty exposures. If these cash balances were direct counterparty exposures, the levels observed would exceed the counterparty guidelines at the 'AAAmmf(chn)' level in Fitch's rating criteria.

MATURITY PROFILES
The funds' maturity profiles are maintained in line with Fitch's 'AAAmmf(chn)' criteria. The funds also limit the maturity date of any single investment to 397 days other than policy bank floating-rate notes (FRNs), which may have maturities of up to 24 months. As at end-November the funds' weighted average maturity and weighted average life stood well within Fitch's guidelines.

LIQUIDITY PROFILES
The funds' investment restrictions are aimed at maintaining strong levels of daily and weekly liquidity to meet investors' redemption requests, in line with Fitch's rating criteria for 'AAAmmf(chn)' funds. Portfolio liquidity is conservatively managed, in line with investors' concentration.

The CIFM Cash Liquidity Fund offers T0 liquidity, differentiating it from the other funds in Fitch's peer review. To accommodate this liquidity profile it retains a material balance of uninvested cash at its custodian bank. Accordingly the uninvested cash balance at the custodian, while high, also represents a prudent liquidity management tool.

FUNDS' OBJECTIVES
The funds' objective is to provide capital stability, liquidity and income through investment in a portfolio of high credit quality money market instruments and short-term bonds. The funds are benchmarked against the seven-day net deposit rate.

INVESTMENT MANAGERS
Fitch views the asset managers' investment management capabilities, operational controls, financial and resource commitments and compliance procedures as consistent with a 'AAAmmf(chn)' National Money Market Fund rating.

RATING SENSITIVITIES
The ratings may be sensitive to significant changes in the credit quality or market risk profile of the funds. A significant adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings. Volatile interbank market conditions and tight liquidity as experienced during June and October 2013 may pose challenges even for the conservative profile of the funds relative to the broader MMF universe in China, particularly when accompanied by redemption pressure.

A downgrade of the sovereign's international Long-Term Issuer Default Rating (A+/Stable) may not necessarily result in a downgrade of the funds' National Money Market Fund Ratings as they could continue to represent the lowest credit, market and liquidity risk available in China, in line with Fitch's national scale rating approach.

SURVEILLANCE
To maintain the funds' rating, Fitch receives weekly fund and portfolio holdings information sent through an independent source at the asset managers and conducts surveillance checks against its ratings guidelines.