Yu'e Bao's Declining Returns

In the realm of finance, few phenomena have caused as much excitement and fascination as Yu'e Bao, the money market fund that became a household name in ChinaThis investment platform seemed to grant the average person easy access to wealth management, boasting exceptionally high returns that approached 7% just a decade agoHowever, the tides have turned dramatically, and it is imperative to explore the reasons behind its current declineOn January 12, 2025, the seven-day annualized yield of Yu'e Bao dipped below 1.2%, marking a historic low since its inceptionThis significant drop raises questions about the shifts in financial markets and economic conditions that have affected this once-revered investment vehicle.

The initial surge of Yu'e Bao was nothing short of a revolution in financial cultureWith its accessibility and the allure of high returns, it quickly amassed millions of usersBy the end of 2013, the number of accounts had reached over 43 million, with assets under management soaring to more than 185.3 billion RMBFast forward to 2018, and the platform boasted over 600 million users and saw its total assets surpass an astonishing 1.2 trillion RMBYu'e Bao was positioned as a "national wealth management treasure," fundamentally altering the financial habits and perspectives of many Chinese citizens, igniting a nationwide fervor for personal finance.

However, this golden age did not last indefinitelySince late 2017, the allure of Yu'e Bao began to wane as its yields embarked on a prolonged downward trajectoryIn 2018, the yield slipped below the 4% mark, followed by a drop to under 2% in 2020. By August 2022, investors were taken aback as yields fell below 1.5%. Continuing this trend, by early 2025, the historic plunge below 1.2% starkly contrasted with the previous rates that had kept millions entranced.

The reasons for Yu'e Bao’s decline are multifaceted and represent broader trends within the monetary fund landscapeAs of February 10, 2025, the average seven-day annualized yield across 370 money market funds had plummeted to 1.36%, with more than 70% of those funds yielding less than this threshold

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Once heralded as the hallmark of stable income, these funds are now generating returns far from their prosperous past.

There are several underlying factors contributing to this dramatic shiftFirst and foremost, the People's Bank of China has instituted a series of accommodative monetary policies aimed at stimulating economic growth in recent yearsThis included multiple interest rate cuts and lowering reserve requirement ratios, flooding the market with liquidityThe result was an abundance of capital in the market, leading to diminished short-term interest rates—a key component in the yield structure of Yu'e BaoAs short-term rates decreased, so too did the returns on the short-term bonds and bank deposits that constitute the majority of Yu'e Bao's investments.

Furthermore, the implementation of new regulatory policies has also impacted Yu'e Bao’s yields significantlyA revised set of fund regulations that took effect October 1, 2017, introduced constraints on portfolio duration, investment thresholds, and stricter caps on certain types of credit assets, resulting in a proportional decline in overall fund yieldsMore recently, in May 2023, additional rules mandated that for money market funds managing assets upwards of 200 billion RMB or servicing more than 50 million investors, the average remaining maturity of the investment portfolio cannot exceed 90 daysSuch measures have further suppressed the yields of larger funds like Yu'e Bao, impacting their competitiveness in the market.

The economic climate, too, has compounded these challengesWith a slowdown in economic growth, demand for capital has lessened, leading to a competitive marketplace filled with money market fundsTo attract investors, these funds have been forced to lower their yield offerings, a trend that has adversely affected major players like Yu'e BaoAdditionally, the introduction of guidelines governing interbank demand deposit rates has caused those rates to decline, leading to a reduction in the yields available to funds reliant on this income.

As a large-scale money market fund, Yu'e Bao appeared formidable in 2018 when it soared to over 1.68 trillion RMB in assets

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Currently, its size has decreased to approximately 770 billion RMB; however, it remains a giant among competitive fundsFor context, the combined assets of the second to fourth largest funds barely reach the same figure, underscoring Yu'e Bao's continued dominance despite its reduced scale.

This substantial size presents unique management challenges that can hinder responsiveness to market movementsThe difficulty in adjusting its investment portfolio due to its sheer size limits Yu'e Bao's ability to participate rapidly in high-yield opportunities when they ariseConsequently, to maintain fund security and liquidity, it has been forced to rely on lower-yielding yet less risky investments, inevitably impacting its overall return potential.

Looking ahead, the indicators suggest that a yield below 1% for Yu'e Bao may be more than just a possibility; it could soon become a realityRecent policy suggestions point towards a continued trajectory of both active fiscal measures and moderately loose monetary policies, with an emphasis on comprehensive interventions to stabilize the economyUnder these conditions, market rates are likely to continue downward, echoing the path of Yu'e Bao's yield.

Currently, fixed deposit rates offered by commercial banks have fallen below 2%, aligning closely with Yu'e Bao's yield fluctuationsThe yield on one-year government bonds, which has traditionally served as a benchmark, was at 2.12% at the end of 2023 but dropped to just 1.42% in early February 2025. With this downward trend anticipated to persist, the yield for one-year bonds may soon dip below 1%, which would similarly drag down Yu'e Bao’s returns.

In light of these developments, savvy investors may want to explore alternatives for their investment strategiesOptions such as short-term bond funds, which focus on securities maturing within a year, present safer avenues with potentially higher yields than traditional money market fundsRecently, the one-year return for such short-term funds ranged from 2-3%, illustrating a more stable performance during turbulent times.

Additionally, index funds focusing on interbank certificates of deposit have recently shown better average returns than traditional money market funds, with annualized yields of 1.84% compared to Yu’e Bao’s substantially lower returns

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