FUND managers in China have tightened their risk controls and are loading up on short-term paper of banks, which they consider less likely to default than companies.

    Lenders sold 6.2 trillion yuan (US$928 billion) in certificates of deposit in the first half, tripling from 1.7 trillion yuan a year ago. While China’s securities regulator banned money market funds from buying corporate debt rated below AA+ in February, there are no limitations for certificates of deposit.

    HFT Investment Management Co. and Ping An Asset Management Co. say they have stepped up the scrutiny of risky notes.

    “Banks have a stronger credit profile than companies,” said Shanghai-based He Qian, a fund manager overseeing about 20 billion yuan at HFT, who didn’t give details about his new investment limits.

    “Lenders can go bankrupt, too, but it only happens after company failures lead to a surge in nonperforming loans. So, while investors may not dare buy corporate debt with low credit ratings, they are willing to put money into lower-rated certificates of deposit,” He said.

    Demand for the perceived safety of certificates of deposit is being fueled by a rising number of corporate bond defaults, which have almost tripled so far this year from the whole of 2015. Companies pulled more than 200 billion yuan in planned bond sales in the second quarter as economic growth matched the slowest pace since 2009. That has left plenty of cash to be parked in short-term paper, which smaller banks have been issuing to fund their business instead of using interbank loans.

    The yield on three-month certificates of deposit sold by AAA rated issuers has tumbled 44 basis points this year to 2.68 percent, compared with the 2.87 percent

    Taian Bank Co., a city commercial lender rated AA- by China Chengxin Ratings, issued one-month certificates of deposit at 2.70 percent last week, compared with the one-month Shibor of 2.81 percent. The low rate underscores expectations that policymakers won’t allow lenders to fail. (SD-Agencies)