China’s banking regulator plans to tighten rules on so-called cash-management products (CMPs), impacting an estimated US$2 trillion worth of the investments, according to a Bloomberg report that quotes trusted sources.

The China Banking and Insurance Regulatory Commission (CBIRC) is said to be aiming to treat CMPs similar to money-market funds (MMFs) by imposing stricter rules on pricing and restricting where and for how long the inflows can be invested, according to the sources who requested anonymity. CMPs are issued by banks and are more liquid than MMFs, , which are sold by asset managers.

The current looser regulation of CMPs enables banks to offer higher yields than those on MMFs and the CBIRC’s proposed changes could, if implemented, lessen their investment appeal, the sources suggested. The moves are another step in China’s fight against financial risk as policy makers try to limit the impact rising defaults and a slowing economy.

A sizeable market

MMFs, overseen by the securities regulator, cap duration of their investments at an average 120 days while no limit is applied to CMPs. The CBIRC is also said to want to make pricing stricter by curbing so-called deviation.

Asset managers are allowed to calculate the net asset value (NAV) of an MMF in two ways. However, when the NAV under one method deviates beyond a specified level from the other, the fund is required to take measures such as limiting new subscriptions or even liquidating assets.

CMPs accounted for more than 13 trillion yuan (CNY) – equivalent to around US$2 trillion – or about 60% of outstanding wealth management products (WMPs) in June 2018, according to data from Jinniu Wealth Management. Individuals hold nearly 90% of WMPs mainly because many believe they’re shielded from losses – a view officials have attempted to discourage.

WMPs are issued by banks and typically offer yields of 2% to 5%, against 1.5% on one-year bank deposits, investing in anything from bonds and stocks to property. Like mortgage-backed securities in the US, WMPs had become key building blocks of a shadow-banking system that existed largely off banks’ balance sheets.