Illustration: Lu Ting/GT

A yearlong explosion in new financial services from nonfinancial companies took a pause last week, when the central bank put the brakes on a plan by Internet giants Alibaba and Tencent to offer virtual credit cards in partnership with China CITIC Bank. The sudden rush into financial services by private firms has provided some much-needed competition for China's stodgy traditional lenders, most of which are State-run banks noteworthy for their lack of innovation.

But the appearance of so many new services from a wide variety of companies also presents a big risk for China's financial sector, since many of these services aren't heavily regulated and most new players have little or no experience in the area. Accordingly, financial regulators should take this opportunity to temporarily halt the introduction of similar new products and services, and work quickly to understand risks to better regulate and encourage healthy development of the emerging sector.

Tencent, Alibaba made headlines last week when they announced their newest financial services product, a form of virtual credit card, in separate partnerships with CITIC Bank. Shares of CITIC Bank jumped 3 percent on the news, as investors bet it would get a big new revenue source from its partnership with the two Internet giants.

But in a swift reaction, the People's Bank of China put a halt to the plans, though it stopped short of an outright ban. Media cited concerns about security and customer privacy protections for the sudden move, and both companies confirmed they had received letters requesting the halt in the rollout, which Alibaba had planned for this week.

The central bank's move follows an unprecedented wave of new financial product rollouts by Tencent, Alibaba and others over the last year, as China gears up to allow private investment into the sector to foster innovation and competition for State-run banks that now dominate the landscape. 

Alibaba kicked off the rush last summer, when it launched Yu'ebao, a product that functions much like traditional savings accounts. But unlike traditional savings accounts that are tightly controlled, Yu'ebao invests users' funds into money markets, a less regulated product that typically provides better returns than State-set interest rates for savings accounts. The innovation prompted a big outflow of funds from traditional savings accounts, as Tencent, Baidu and others set up similar products.

Since then, other companies from inside and outside the Internet sector have jumped onto the bandwagon, with names as diverse as appliance makers Gree and Midea, and electronics retailer Suning all joining the rush. The frenzy of new services reached a new peak last week, when Alibaba and Tencent were among five recipients of new private banking licenses issued by the government as the centerpiece of its liberalization drive.

While most have praised the arrival of new services to challenge the banks, the rapid change has also attracted some critics. The most high-profile attack came last month, when influential CCTV financial commentator Niu Wenxin compared the new services to vampires for sucking money away from the traditional banking system. But others came to Alibaba's defense, and the central bank ended the debate by saying it had no plans to ban Yu'ebao or any of the other similar services.

The central bank should be praised for its liberalization drive, which will provide both borrowers and savers with attractive new alternatives to the current choices from State-run banks. It also deserves praise for its relative laissez-faire approach of the past year, as it raised minimal interference and largely let the market determine what new products to offer.

But many of these new products aren't well-understood and have no history in China, meaning the risks associated with them also need to be better understood. That doesn't mean the products should be banned outright, but rather the central bank and providers themselves need to better understand the associated risks that will come with inevitable market downturns.

Accordingly, the central bank was prudent for finally stepping on the brakes last week with its call to halt the rollout of Alibaba's and Tencent's virtual credit cards. Regulators and these companies should now take this opportunity to do more analysis and launch a dialogue to create a more solid framework of rules, which can promote the healthy development of this sector and minimize the risks for everyone.

The author is a former company news reporter from Reuters. He writes about China's company news at www.youngchinabiz.com. bizopinion@globaltimes.com.cn