From an April 9, 2014 note from Macquarie:

95% of Yu E Bao’s money is invested in agreement deposits (协议存款), which are not subject to RRR (Required Reserve Ratio). The ultimate outcome of interest rate liberalization is for regulated interest rates to go up and unregulated interest rates (e.g., returns of private lending, Yu E Bao) to come down, implying better financial resource allocation and stabilized rates over the long term.
Yu E Bao products do not represent financial innovation by nature but take advantage of policy arbitrages by investing in interbank negotiated deposits. In comparison, US money market funds mostly invested in risky assets that are not involved in money creation in the banking system.
These Internet products in China, although limited in size (Rmb500bn vs. total deposit base of Rmb105tr), enjoyed rapid growth this year and posed pressure for banks to increase rates in the competition for deposits, thus pushing up the cost of capital in the whole system. The policymakers, therefore, suggest regulating the Internet Finance products by requiring deposit reserves. Assuming 20% of the Internet money market funds are submitted as reserves at the PBOC in exchange for a return of 1.62%, yields on the “Yu E Bao” will come down by at least one percentage point.
While interest rate liberalization will inevitably bring down NIMs, we believe the market has been overly bearish on the long-term impact on banks’ profitability. In addition, potential regulations on the Internet money market funds may help relieve some pressure for banks suffering from intensifying competition for deposits and high cost of capital.