But according to Tian Hong's fourth-quarter report, more than 90 percent of its fund assets were in the form of agreement deposits with banks, also known as negotiated deposits.

Less than 7 percent of the fund's assets went into fixed-income securities - the usual choice for money market funds in other countries.

The massive assets available to the online fund allowed it to negotiate preferential interest rates for its deposits with banks, many of which sought alternatives to raising liquidity in the interbank market last year when interest rates there surged.

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But analysts have warned that portfolios structured in this way ultimately render money market funds vulnerable to fluctuations in the interbank market.

The average interest rate for agreement deposits has fallen below 5 percent from a peak of 9 percent before the Lunar New Year, which began on Jan 31, and it's still declining.

That means the online funds have seen their returns from these deposits decline, and they're offering lower rates for WMPs. The return rate for various online wealth management products has declined from more than 7 percent earlier this year to about 6 percent now.

Zeng Linghua, chief researcher with howbuy, an investment consultancy website, said the return rate of money market funds is set to fall even further to 4 percent in March.

"Money market funds require high liquidity, but agreement deposits are mostly based on fixed contracts, so there are cases of mismatch. Sometimes the fund company has to make advance payments on its own," said Xu Gao, chief economist with Everbright Securities Co.

There are other problems, too. Some funds have at times withdrawn their deposits from banks in advance of the agreed maturity. Regulators may halt that practice, which will pose a further challenge to the liquidity of fund companies.

Although the majority of the money deposited with the online funds is still circulating within the broader banking system, Xu expressed concern that the online "spoilers" could further raise financing costs.

"The capital cost for banks will inevitably rise, which may be passed on to the real economy," he said. "But a declining interbank capital market may not be adequate to support such high yields, so default risk does exist."

Niu Wenxin, a commentator with China Central Television, has been among the most vocal critics of online funds, calling Yu'E Bao a "leech" on the banking system.

"By establishing expectations of high yields, (the funds) merely cause higher borrowing rates and tighter liquidity in the money market," Niu wrote on his blog. "To protect the county's macroeconomic interests, the authorities should ban Yu'E Bao."

Don't worry about aggressive credit tightening

Non-resident yuan deposits reach 1.36 trl yuan