Regulators cheer on online finance

China's regulators are supporting the development of new forms of online finance - within certain limits - as traditional banks watch the encroachment of revenue-hungry Internet companies onto their turf.

The central bank will support the burgeoning Internet finance sector, but it will prevent the fledgling industry from moving into areas such as illegal fund-raising, said Liu Shiyu, vice-governor of the People's Bank of China.

"Based on the premises of honesty and trust, all financial activities and services that are beneficial to inclusive growth should be respected and encouraged," Liu told the Internet Finance Summit on Tuesday.

Spearheaded by e-commerce group Alibaba Group Holdings Ltd, leading Internet companies aim to shake up the financial industry with new services.

The third-party payment segment appears to be the earliest such challenge. It's also closest to established online services offered by traditional banks.

Third-party payments surged 24 percent in the second quarter to 247.9 trillion yuan ($40.5 billion), PBOC figures show.

China Securities Co Ltd has suggested that third-party payment tools were used to conduct more than 80 percent of online transactions last year.

While Alipay, the payment system offered by Alibaba, has dominated the arena since its launch in 2004, the situation is set to change. Companies like Tencent Holdings Ltd are coming up with solutions that offer safety and ease in transactions.

Tencent has enabled online transactions for select merchants by linking payment services to its popular WeChat smartphone application, which has more than 300 million users globally. Many other companies are following suit with their own payment systems.

The central bank regulates the market through a licensing process that began in May 2011. As of July, 250 institutions had been granted licenses.

As competition increases, Alibaba is mulling changes. The launch of Yuebao, a service allowing users to invest money stored online into a money market fund, was a critical step in the company's expansion of its financial territory. Yuebao offers a deposit product, like a bank, but with higher returns.

The product has run into some headwinds, as the China Securities Regulatory Commission said in June that Alipay hadn't submitted all the required information.

But the CSRC also offered words of encouragement for such services, saying they offer "more investment options".

Internet companies are also eyeing small-loan businesses to aid cash-starved micro and small enterprises.

For instance, JD.com, China's leading home appliance online vendor, launched a financial service platform to help suppliers get loans from participating banks.

Likewise, Suning Commerce Group Co Ltd, China's largest e-commerce outlet, said it would set up a microcredit company to support suppliers on its online retail platform.