Growth in the two darlings of mainland China internet finance - online money market funds and peer-to-peer lending (P2P) - have slowed after last year's freewheeling boom. Held up as examples of home grown innovation in internet finance, they were largely borne out of the liquidity crisis in China's interbank market that started late in 2013. At their peak, the two online platforms transformed the Chinese public into "reverse ATMs" where capital could be sourced from the masses, plugging gaps in the banking system by directly allocating funding where it was needed. "There will be a crackdown on P2Ps. However, regulators are unlikely to intervene in a major way [because] deterring individual platforms could be like creating a credit event that could have a chain reaction across the industry," said Howhow Zhang, the former head of research of Z-Ben Advisors. Caught between stock market rallies earlier this year and the crush of money market fund returns, some investors looking for higher yield alternatives turned to P2Ps, online crowd-funding platforms where investors pool funds to lend to individuals or companies that may otherwise have been turned down by banks for credit. However, unlike money market funds, which are strictly regulated by the China Securities Regulatory Commission, P2P platforms have remained largely unregulated. Led by Alibaba and Tianhong Asset Management's Yu E Bao product and followed by an army of "me too" imitators engineered by WeChat and Baidu, online money market funds were an unstoppable force last year. Touting yields as high as 7 per cent at their peak, China's internet-enabled investors flocked to move savings out of low-return bank accounts into such funds offering significantly higher returns and same-day liquidity. In effect, investors treated these funds as quasi-deposits, putting as much as three trillion yuan (HK$3.7 trillion) into such funds last year. With the People's Bank of China's multiple interest rate cuts and reduction in the required reserve ratio, yields for money market funds have fallen to new lows. Among the top 10 largest funds by assets, the latest one-year return ranged from just 3.9 per cent offered by the Fortune SG Cash Income Money Market ETF to Aegon-Industrial's Tianli Money Market Fund product, which returned 4.73 per cent. Yu E Bao, which previously accounted for as much as a third of all money market assets, saw 98.3 billion yuan in outflows over the second quarter of this year. Total assets of all money market funds stands at 2.41 trillion yuan. Overall, Ant Financial, WeChat and Baidu accounted for 613.4 billion yuan, 90.1 billion and 41.7 billion worth of money-market funds assets respectively, according to Z-Ben Advisors' estimates. "P2Ps are fragmented. It is not in itself a high-margin business - platforms are reliant on volume. It is only from boosting turnover that they could become scalable," said Zhang. He said online sales of P2Ps have become fully saturated. Platform companies survive by recruiting youngsters into their network, selling among friends and relatives. Wandaizhijia, a Shanghai-based P2P-focused portal, estimates there are 2,814 P2P platforms on the mainland, with 786 reported to be "problematic". In a bid to rein in the unregulated P2Ps, last month 10 government departments, led by the CSRC, the China Banking Regulatory Commission and the People's Bank of China, issued a guidance document setting out proposed regulations over the platforms. The key message is that independent custodians will be compulsory. Money previously freely floated on P2P platforms will be brought back into the banking system by appointing banks as third-party custodians charged to safeguard such assets. P2Ps will also be banned from providing the guarantees they gave that allowed borrowers to multiply their borrowings, masking the true level of debt. Some mainland media reports have speculated that a substantial number of P2P platforms are likely to collapse when the new regulations kick in. "The new measures have brought great uncertainty to the industry. It will affect developments," says Wu Xianyong, chief executive of Shenzhen-based Touna. Wu believes it is a new beginning for the industry, which had fallen into a negative cycle of unhealthy competition. He likens it to the survival of the fittest. "Good companies will survive from here," he says.