Investors have warned of growing systemic risks in China’s $1.09tn money market fund industry, as funds buy up bank credit despite a surge in bad debt this year.

Comparably high yields and low risk at Chinese money market funds in recent years have made the industry a favourite among retail investors in the country. Assets under management have grown from Rmb600bn at the end of 2012 to an estimated Rmb7.3tn ($1.09bn) in March, making it the second-largest market in the world after the US.

But in recent months China’s central bank has tightened monetary policy and access to credit, forcing down the funds’ once-attractive yields. At the biggest funds, average returns have dropped to an annualised 3.7 per cent from about 4.5 per cent at the start of the year.