Total assets of money market funds shrank 47 percent in the first half to 2.52 trillion yuan ($410.8 billion), figures compiled by China Galaxy Securities Co Ltd show.
Many investors shifted from MMFs into higher-yielding short-term instruments during the money squeeze in June, said Li Kui, a Shanghai-based fund manager.
Volatile interbank market conditions and tight liquidity have increased pressure on the net asset values of many Chinese MMFs, which are heavily exposed to the interbank markets and short-term bond markets.
The overnight Shanghai interbank offered rate, an average of the rate at which large banks lend among themselves, rose to 5.5 percent on June 25 from 3 percent on May 20, down from a high of 13.4 percent on June 20.
"Under the circumstances, a seven-day money market fund with an annual yield of four percent has no appeal to investors, and many institutional investors redeemed money market funds to buy other, higher-yield products," said Li.
Analysts said public funds may recover in a couple of months and the worst phase of the liquidity crunch has ended.
They added that capital may flow back into lower-risk products such as MMFs.
"While banks are no longer under great pressure to secure deposits after the reporting season, they may no longer have incentives to offer higher-yield products," said Wu Yinzhou, an analyst with Shanghai-based Fulun Consultancy.
The assets under management of MMFs stabilized after a sharp contraction in June. The funds will gradually regain their appeal for investors, given their intrinsic low risk and high liquidity, said Wu.