Bank deposits for money market funds like Alibaba Group Holding Ltd's Yu'ebao should be subject to the deposit-reserve requirements, a China central bank official said.

A major reason why Yu'ebao and similar financial products can offer investors high returns is they are not subject to deposit reserve management, Sheng Songcheng, head of the People's Bank of China's statistics department, said in an opinion piece published on the bimonthly China Finance journal on Sunday.

"By putting money market funds under deposit reserve regulations, we will ensure fair competition and reduce the scope for regulatory arbitrage," Sheng said. He estimated Yu'ebao's yield will drop about 1 percentage point if 20 percent of its bank deposits are set aside as reserves.

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The PBOC will also "avoid the liquidity risk that may be caused by a run on Yu'ebao accounts" and "improve the effectiveness of its monetary policy" through reserve regulations on money market funds, Sheng said.

By end-February, the seven-day annualized yield of Yu'ebao hit 6.03 percent, more than 15 times the interest rate of renminbi current-account deposits. Although it has since dropped, the yield remained above 5 percent in general, much higher than the deposit rates and most wealth-management products offered by banks.

Comparatively higher returns helped Yu'ebao draw in more than 500 billion yuan ($81.11 billion) in investments to end-February from its launch in June. About 95 percent of funds raised by Yu'ebao were deposited with banks.

"If the bank deposits of Yu'ebao are subject to reserve requirements, the banks could no longer offer a high deposit rate to Yu'ebao and the return on the money market fund will decline accordingly," Sheng said in another opinion piece carried by the Chinese paper Financial News on March 19.

Currently, the PBOC requires large banks to set aside 20.5 percent of their deposits as reserves. The requirement for small and medium-sized banks is 17 percent. Some experts say further study and discussion is needed as to whether bank deposits for Yu'ebao should be subject to deposit reserve management.

"There's no need to keep a portion of Yu'ebao's deposits in reserve at the central bank as long as the banks could handle the liquidity risk," said Wu Qing, a financial researcher with the Development Research Center of the State Council.

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