For a while, the government allowed a grey area to exist as it wanted to encourage innovation and bring about change within the state-dominated financial sector.

“In their early stages of development, internet finance companies offered some benefits and new experiences to consumers,” said Lu Zhengwei, chief economist of Industrial Bank.

“And as the financial regulators failed to keep up [with the trend], so they received more growth opportunities.”

That all changed last year, however, when peer-to-peer lender Ezubao was found to have fleeced almost 1 million investors out of 50 billion yuan (US$7.44 billion).

The People’s Bank of China, which plays a central role in the country’s newly created national financial stability and development committee, said in a report released on Friday that it plans to tighten controls and plug regulatory holes in the sector, including building an information disclosure platform.

Also, for companies that have grown too big to ignore, the bank said it will consider including them in its Macro Prudential Assessment framework, which will make them subject to a variety of appraisal requirements and in some cases force them to maintain cash reserves.

“Some internet finance products have already achieved systematical importance, [so there] needs to be protection against procyclical fluctuations and cross-market inflection of risks,” it said.

Most private lenders would not be able to survive such rules, an analyst said.

Wu Qing, a senior researcher with the Development Research Centre of the State Council, said that the authorities’ rules are designed to block new entrants and reshuffle the existing players.

“China currently has several thousand online lenders, but that number will be slashed in the future. More than 90 per cent of them could vanish,” he said.

Except for online payments, all other internet financing activities are currently unlicensed, Wu said. But the timetable for licensing those companies has been halted as stabilising the market is now the top priority, he said.

“Early-stage internet finance was a way for online companies, lured by the high profitability potential, to enter the finance business,” he said. “But the vast majority of future growth will come from licensed financial institutions that are expanding their online businesses.”

In an article published in People’s Daily on Thursday, Ping An chairman Ma Mingzhe welcomed the new regulations, saying it is safer for financial institutions to take the lead.

“Financial firms have expertise, are good at risk control and obey rules. Internet innovation led by them rarely has problems,” he was quoted as saying.

“[In contrast, all of the] internet finance platforms that have been found to be carrying significant risks are operated by non-financial institutions, such as Fanya and Ezubao,” he said.

“Without the capability to handle financial operations and risk control, it is just a matter of time before risk events occur.”

Ping An operates Lufax, one of China’s largest online fund platforms.

Cliff Sheng, who oversees Greater China financial services for management consultant Oliver Wyman, said that many online lenders, especially private, non-financial firms, have been hamstrung by a lack of capital.

However, private lenders still have an edge as they are more agile when it comes to technological innovation such as big data applications, cloud computing and blockchain technology, he said.