China’s securities regulator has proposed expanding money market funds’ (MMFs) investment scope in a bid to encourage innovation.

It has also suggested tightening the portfolio requirements of such funds due to the need to improve risk management in the booming market.

The huge popularity of online MMFs over the past two years was cited by the watchdog as a key reason behind its proposed regulatory reforms.

The China Securities Regulatory Commission (CSRC) issued a consultation paper late last week over the amendment of rules governing MMFs. This would be the first the rules were modified since 2004.

The amendments would initially allow MMFs to invest in interbank deposits, a form of financial instrument introduced by China’s central bank in December 2013. The CSRC also said it wanted to allow MMFs to list on exchanges for trading or share transfer, in a bid to boost MMFs’ liquidity and provide different mechanisms for investor redemptions.

The regulator is also encouraging MMFs to expand their functions into cash management.

However, the CSRC is also tightening MMFs’ portfolio requirements, with the average duration set to be lowered to 120 days from 180 days. In addition, investments in single corporate credit or financial instruments are set to be limited to 10% in order to encourage diverse allocations.

In a statement, CSRC said there were concerns over MMFs’ credit and liquidity risks. The regulator said that huge redemptions could cause systemic risks relating to MMFs, the bond market and commercial banks’ liquidity.

The CSRC said there were problems in today’s China MMF market such as fund managers chasing a higher yield level but neglecting the management of daily liquidity risk, and managers competing to boost their fund size while the MMF investor structure was becoming unbalanced.

The amended rules were most necessary for the risk management of online MMFs such Yu’EBao, the regulator said. Yu’EBao was launched two years ago by e-commerce giant Alibaba and Tianhong Asset Management. The CSRC said that by linking an online platforms and MMFs, such products provided low-risk investments, but fund managers and distributors only emphasised yield levels without highlighting risk levels.

The total assets of China’s 180 MMFs grew by 3.78% to Rmb2.17 trillion during the first quarter of this year; at the end of 2014 the assets stood at Rmb2.09 trillion. But the AUM of Yu’EBao, the largest MMF, grew by 23% during the first quarter and hit Rmb711.7 billion at the end of March. MMFs account for 41.3% of China’s mutual fund industry AUM, which stood at Rmb5.24 trillion as of the end of March, according to data from the Asset Management Association of China.