Now that US savers have noticed they can get much better returns elsewhere, they’re pulling money out of their bank accounts. This year, assets held by money-market funds soared by about $530 billion, to $5.3 trillion, as bank deposits tumbled.
This is something new in the US—a result of the Federal Reserve starting to raise interest rates in March 2022 after keeping them near zero for more than a decade. But Chinese banks have long grappled with the problem. The People’s Bank of China has maintained its benchmark deposit rate artificially low at 1.5% since 2015, opening the door for wealth management products offering higher rates to lure savers. In 2017 a repository set up by Alibaba Group Holding Ltd.’s fintech affiliate, Ant Group Co., for leftover cash from online spending became the world’s biggest money-market fund, with assets hitting $270 billion.
Despite the challenges, Chinese banks are still not starved for funding. This is because consumers have learned through unfortunate experience that other types of seemingly safe investments can backfire.
In late 2022 the government in Beijing announced an easing of the stringent Covid Zero policy and vowed to stabilize the property market, which had been plagued by developer defaults and slumping home prices. That led to expectations of a growth boom, and bond yields spiked. Many wealth management products that invested in government securities and high-quality corporate debt reported large paper losses on their holdings. By December, more than one-fifth of wealth management products “broke the buck,” reporting assets worth less than their face value.
Chinese savers fled. The 1.5% they could get from a 1-year term deposit at banks wasn’t generous, but it was better than losing money. Time deposits now account for 70% of household deposits, up 5 percentage points from pre-pandemic levels.
It’s highly unlikely that money-market funds in the US will crack. No US money-market fund has broken the buck since the global financial crisis. Regulatory changes that ensued forced many funds, which had invested in riskier commercial paper, to put their money in government securities. These days, government money-market funds account for 78% of the industry’s assets, up from only one-third in 2014.
Nonetheless, vulnerabilities remain, including the debt ceiling crisis, which could lead to a government default. Money-market funds are not backed by the Federal Deposit Insurance Corp., and fund companies have been jacking up their management fees in recent months. Meanwhile, banks are boosting their offerings, however reluctantly and slowly. So once US consumers take all these factors into consideration, they might just emulate the Chinese and flock back to their banks.Read next: Whatever First Republic’s Fate, the Big Banks Will Win
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