BEIJING---Bank deposits invested by China's money-market funds, including the hugely popular Yu'e Bao, should be subject to reserve requirements just as traditional bank deposits are, a central bank official said.

In an opinion piece published Monday in the central bank-backed Financial News, Sheng Songcheng, head of statistics at the People's Bank of China, repeated a call for making reserve requirements apply to money-market funds --just like the nation's banks--though he said reserves should be made indirectly.

Funds should be parked with the central bank by the commercial banks that hold funds on behalf of these investment companies, he said.

Mr. Sheng said the annualized return of Yu'e Bao would be reduced by one percentage point if there were a 20% reserve requirement on the portion of its money placed as deposits with banks. Major banks need to keep 20% of their deposits in reserve.

Alipay, an affiliate of Alibaba Group Holding Ltd., launched the popular Yu'e Bao fund in June last year. Its success has prompted rival technology firms Tencent Holdings Inc. and Baidu Inc. to offer similar products.

The fund behind Yu'e Bao is now the world's fourth-largest money-market fund, according to Morningstar Inc., with $87.05 billion in holdings as of the end of March.

A spokeswoman for Alipay's parent, Small & Micro Financial Services Group, declined to comment. Alibaba Chairman Jack Ma and other Alibaba managers hold major stakes in Alipay's parent. Alipay was separated from Alibaba in 2011.

Yu'e Bao now offers a return of about 5% to investors, well above the maximum 3.3% that banks can offer on a one-year fixed deposit.

Under current rules, Chinese banks aren't required to set aside reserves for deposits from most other financial institutions, including fund management firms. These deposits are typically restricted to use in loans to banks and other financial institutions. They also aren't included in the loan-to-deposit ratio that covers other deposits from individuals and nonfinancial enterprises.

"Deposits from [investment] company funds aren't subject to bank reserve requirement management, which is the main reason for Yu'e bao attaining such high returns," said Mr. Sheng in the article.

In a report last week, the PBOC said Internet banking services such as online investment funds have brought innovation to the financial sector, without citing specific companies. But the central bank also said they needed to be subject to more supervision, including unspecified "capital constraints."

Online investment funds like Yu'e Bao have become popular with the Chinese public. Their appeal has posed a challenge to the state-controlled banking system, which is moving to keep deposits. Some Chinese state bank officials have called for tighter restrictions on the new sector.

Grace Zhu

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