Banks set to cap rates on Internet funds

China's burgeoning online financial sector is hitting some obstacles, with banks being advised by an industry body to hold Internet-based funds to the terms of deposits.

In a recent internal meeting, the China Banking Association specified the interest rates on the funds' bank deposits, and it told member banks to "strictly observe" the specifications, the Economic Daily reported.

Banks are being urged to cap deposit rates at 1.1 times the central bank's benchmark rate and charge penalties on premature withdrawals of fixed deposits, the report said.

Both steps are said to target Internet money market funds that offer wealth management products.

The funds put most of their huge assets into negotiated deposits with banks, where they can earn high interest rates and usually receive full interest income even if they withdraw the money early.

Experts at the CBA meeting suggested these deposits should be treated as general deposits rather than interbank deposits, meaning the Internet funds would lose their advantages, such as penalty-free early withdrawals.

Further, deposits would be subject to a 20 percent required capital reserve, according to the report.

Economic Daily is one of the major channels through which the central government sends policy signals.

CBA, the self-disciplinary organization of China's financial sector, has 362 members comprising policy banks, commercial banks and other financial institutions.

Analysts estimate the yield of Yu'E Bao, China's largest online WMP, will decline by at least 2 percentage points if the banks adopt the CBA's tougher practices. That fund might have to shift its focus to the riskier bond or foreign exchange markets in search of higher returns.

Tian Hong Asset Management Co, which runs the 400 billion yuan ($65 billion) Yu'E Bao, has put more than 90 percent of its fund assets into negotiated deposits with banks.

Less than 7 percent has gone into fixed-income securities, which are usually the investments of choice for money market funds globally.

He Yingyan, a columnist with Sina Finance, wrote that the "privileges" enjoyed by money market funds were intended to protect them from possible defaults during a municipal investment bond crisis in 2011, and they can now be canceled.

He speculated that the authorities may reinstate the 30 percent cap for negotiated deposits in money market funds' investment portfolios.

Another reason for the association's suggestion was Premier Li Keqiang's call for control of rapidly expanding off-balance sheet transactions, especially interbank transactions.

On Thursday, the annual return rate of Yu'E Bao dipped to 6.09 percent from 6.44 percent a month earlier.

Xu Gao, chief economist with Everbright Securities Co, said the decline was mainly the result of extremely loose money market conditions. The rate may recover in late March as banks do their first-quarter reviews, Xu said.

An online survey by Sina.com showed on Wednesday that 70 percent said they would continue investing in online money market fund products.