China’s Interbank CD Funds: From Market Darling to 60% Asset Plunge

– Total assets of China’s interbank CD funds plunged from ¥355 billion to ¥126 billion, a 60%+ collapse
– 26 out of 101 funds now classified as ‘mini funds’ with assets under ¥50 million, risking liquidation
– Underperformance versus money market funds (1.41% vs 1.43% average returns) eroded competitive edge
– Bond market surge and equity recovery diverted investor capital from these once-popular instruments
– New fund launches continue despite market saturation, highlighting persistent strategy misalignment

Once hailed as revolutionary investment vehicles, China’s interbank certificate of deposit (CD) funds now epitomize the volatility of financial innovations. These interbank CD funds burst onto the scene in late 2021 as accessible alternatives to institutional-only debt instruments, attracting billions from retail investors seeking stable returns. Yet just four years later, the sector confronts an existential crisis with assets evaporating at unprecedented speed. This dramatic reversal stems from fundamental flaws in product design colliding with tectonic market shifts – a cautionary tale about financial products that fail to evolve with investor needs. The accelerating asset hemorrhage in interbank CD funds reveals critical lessons about sustainable fund management in China’s dynamic capital markets.

The Meteoric Rise and Precipitous Fall

China’s interbank CD funds emerged in December 2021 as passive index products tracking the AAA-rated Interbank Certificate of Deposit Index. Their unique 7-day holding period structure democratized access to instruments previously reserved for institutional players. Initial enthusiasm saw explosive growth:

– Seven flagship funds surpassed ¥100 billion ($14 billion) during 2022’s peak fundraising period
– Entire sector amassed ¥355.149 billion ($49 billion) in total assets by mid-2022
– Major institutions like China Asset Management and E Fund Management dominated early issuance

This trajectory mirrored China’s broader wealth management evolution, where yield-starved retail investors embraced innovative fixed-income alternatives. However, the interbank CD funds’ structural limitations soon surfaced.

Inherent Design Constraints

Unlike actively managed bond funds, these passive interbank CD funds offered minimal flexibility during market transitions:

– Mandatory AAA-rating requirement restricted portfolio diversification
– Fixed 7-day redemption windows proved problematic during volatility spikes
– Inability to adjust duration exposure left funds vulnerable to rate fluctuations

These constraints became critical as macroeconomic conditions shifted dramatically in 2023.

The Alarming Scale of Contraction

Current data reveals an industry in freefall. As of August 15, 2025:

– Total interbank CD fund assets collapsed to ¥125.826 billion ($17.3 billion)
– 88% of funds (89 out of 101) experienced post-launch shrinkage
– 63 funds suffered catastrophic declines exceeding 80% of initial assets

Case Studies in Decline

Shanghai-based mid-sized fund manager GF Fund Management exemplifies the trend. Their December 2022-launched interbank CD fund illustrates the three-stage erosion pattern:

1. Initial ¥3.7 billion ($510 million) launch
2. First-quarter 2023 redemption avalanche: ¥3 billion outflow
3. Terminal decline to ¥51 million ($7 million) by Q2 2025

Similarly, a Shanghai bank-affiliated fund collapsed from ¥1.831 billion to ¥10 million within 18 months. These interbank CD funds now face regulatory liquidation thresholds.

Liquidation Crisis and Survival Struggles

With 26 interbank CD funds holding less than ¥50 million ($6.9 million), liquidation proceedings loom under China Securities Regulatory Commission (CSRC) guidelines. Funds falling below this threshold for 50 consecutive days face automatic termination without shareholder votes.

Desperate Measures

Fund companies deploy various tactics to avoid dissolution:

– Petitioning regulators for survival exemptions, as one October 2023-launched fund achieved
– Merging share classes to artificially inflate fund size
– Waiving management fees to retain existing investors

Not all efforts succeed. One late-2023 fund failed to convene required shareholder meetings when participation fell below the 50% threshold, accelerating its path to termination.

Performance vs Alternatives: The Core Problem

The interbank CD funds’ fundamental weakness lies in comparative returns. Recent performance data shows:

The Market Shift Factor

Beijing fixed-income researcher Wang Ming (王明) explains: ‘The interbank CD funds launched as ideal money market alternatives but failed to deliver superior risk-adjusted returns. When China’s bond bull market accelerated in 2023, capital migrated toward higher-yielding instruments.’

Concurrently, China’s equity market recovery beginning in late 2024 further diminished the appeal of these interbank CD funds. As Shanghai Securities Exchange composite index gained 22% in early 2025, retail investors shifted toward balanced funds offering equity participation.

Survivors and Future Prospects

Despite sector-wide carnage, three interbank CD funds demonstrated remarkable resilience:

– China Post & Capital Fund Management: Grew from ¥2.88B to ¥73.72B
– Peng Hua Fund Management: Expanded from ¥24B to nearly ¥90B
– Hua Tai Bai Rui Fund Management: Became sector leader at ¥90B+

These outliers shared strategic advantages:

– Earlier launch timing capturing initial enthusiasm
– Parent companies’ established distribution networks
– Supplementary liquidity facilities during redemption waves

New Entrants Amid Contraction

Surprisingly, nine new interbank CD funds launched in 2025 despite market saturation. CITIC-Prudential Fund Management’s July entry raised ¥672 million ($92.5 million), while Debon Fund Management has pending applications.

Guangzhou-based fund marketing executive Li Na (李娜) warns: ‘This demonstrates how fund companies mechanically chase trends without assessing market evolution. Latecomer interbank CD funds face nearly impossible scaling challenges.’

Strategic Implications for Investors

The interbank CD funds crisis offers crucial lessons:

– Scrutinize fund structures for adaptability to changing rate environments
– Monitor concentration risk when multiple products track identical indices
– Evaluate manager contingency plans for mass redemption scenarios

Investors in surviving interbank CD funds should reassess whether current allocations align with China’s shifting monetary policy landscape.

Broader Ramifications for China’s Fund Industry

This episode highlights systemic issues in Chinese product development:

– Herding behavior among asset managers creating supply gluts
– Regulatory approval processes lagging market dynamics
– Inadequate investor education about product limitations

As China Securities Regulatory Commission contemplates reforms, the interbank CD funds experience may prompt:

– Stricter product viability requirements
– Enhanced liquidity risk management rules
– Performance benchmarking against relevant alternatives

These interbank CD funds provide the clearest recent example of how financial innovations can rapidly become obsolete without continuous adaptation.

Financial professionals and investors must recognize that yesterday’s breakthrough product often becomes today’s liability. The interbank CD funds collapse underscores the critical importance of dynamic portfolio construction responsive to monetary policy shifts. Asset managers should immediately review their product pipelines through this lens while investors reevaluate exposure to underperforming instruments. Request detailed redemption timelines and liquidation contingency plans from fund providers – your capital preservation may depend on it. For deeper analysis of China’s evolving fixed-income landscape, subscribe to our securities market insights newsletter.