(Yicai Global) July 4 -- Several Chinese banks have increased rates on certificates of deposit (CD) by more than 40 percent to tackle challenges from money funds and to retain major depositors.

Lenders have hiked CD yields to retain major clients, the 21st Century Business Herald reported. "Though the increase in yields depends on the maturity and amount of CDs, yields have risen about 40 percent, with rates on CDs of over CNY500,000 (USD73,500) up 42 percent," a relationship manager at Ping An Bank Co. [SHE:000001] said.

"Money funds will definitely impact banks. That's why we raised deposit rates last month. However, there is a cap on bank deposit rates. Deposits are thus not as flexible as money funds such as Yu'e Bao, and their yields will be lower," said deputy general manager of an urban commercial bank's corporate banking division.

"Money funds' scale is closely related to yields. Liquidity is tight in the market right now, prompting capital flows to money funds and a sharp increase in their size. Money funds' role is more like that of a reservoir," a director at Shanghai Chongyang Investment Co. said.

Many factors could cause money-fund yields to increase, including a liquidity squeeze, assets held by such funds coming due and substantial redemptions, said Wen Xiujuan, money fund manager at GF Securities Co. [SHE:000776], adding that the recent rise in money-fund yields is related to a liquidity squeeze and a gradual increase in market interest rates.

Seven-day annualized yields on money funds have reached 4.33 percent on average, according to data from RoyalFlush. Seven-day annualized yield on Harvest Money Fund B has hit 10.226 percent, and 13 money funds have yields of over 6 percent.