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China's asset management industry has had explosive growth in the last two years following the arrival of online money market funds, which have transformed the way millions of Chinese invest their savings. The booming popularity of money funds, however, has led several investment experts to raise serious concerns about risks developing in the industry as a result. The funds' appeal is strong given that most of them offer annual returns of 4-6 percent, compared with the 3 percent Chinese individuals receive on their bank deposits. The returns have helped money market funds' assets under management grow nearly 15-fold in the past four years to 1.9 trillion yuan ($306 billion) at the end of 2014, according to Goldman Sachs Asset Management. Robert Pozen, senior lecturer at Harvard Business School and former chairman of MFS Investment Management, the oldest U.S. mutual fund company, fears investors are being drawn to the high interest rates without any understanding of the risks. Read More MSCI move to give China stocks a $400B boost The funds offer high interest rates, he says, but "they are not explaining that in many cases this type of paper is not top quality. This is essentially what we would call primary junk funds in the U.S. — paper that's usually below investment grade, fluctuates daily in terms of interest rates and from time to time defaults. "The big risk is selling to relatively unsophisticated investors over the internet who probably do not know what they are getting into. There is a real possibility of loss here." The biggest winners from the influx of cash into online money funds have been large Chinese internet companies like Alibaba, Tencent and Baidu. They were quick to recognise that selling money funds over the internet to consumers who were comfortable with online transactions could translate into big business.

Alibaba's money fund Yu'E Bao (Leftover Treasure), which is marketed to users of the group's online payment platform Alipay, has been particularly successful. Cash transfers from bank accounts to Yu'E Bao take just one click. Its assets have risen from zero to 578 billion in less than two years. Rating agency Fitch has highlighted the level of retail investor cash flowing into the funds as a cause for concern. It noted in a report written last month that yield-hungry retail investors are prone to herding patterns of behavior when markets become stressed, which could lead to "periods of mass fund exodus." More from The Financial Times:

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This is particularly worrying because Chinese retail money funds invest heavily in deposits and bonds with long maturity dates in order to keep yields competitive, say Fitch analysts Alastair Sewell and Li Huang. The money funds have a minimum investment threshold of just 1 yuan and investors can redeem their holdings at any time, potentially creating a large liquidity mismatch.

"Since e-commerce money market funds are retail-focused, they tend to have a less stable investor base," say the Fitch analysts. Meeting redemptions in a stressed market "may challenge those funds with higher exposures to less liquid securities, larger funds and those with more concentrated investor bases." Meeting large outflows "could be problematic." Read More This could open the door to China's hot market

Flows to online money market funds have slowed in 2015, but most commentators agree that they will continue to attract large numbers of retail investors in the next two years. Stephen Tu, vice-president at rating agency Moody's, says Chinese money funds have "only captured a relatively small percentage of the total savings and liquidity in China." The pool of investors drawn to such products is likely to expand given new technology companies with big customer networks continue to enter the money fund industry.

Xiaomi, the world's third-largest smartphone maker, is the latest. It said last month it would team up with asset manager E Fund Management to sell a money-market fund through a finance app bundled on the technology company's operating system. "It's a nascent environment now and there are likely to be more entrants," says Mr. Tu. "In the long run, we could see a handful of key players providing these services." Online money market funds are more convenient than traditional bank accounts, he adds.