China's Internet industry will see more innovation, domestic demand and fiercer competition in the coming years after a series of M&A deals stirred the world's top Web market in the past seven months, industry insiders said on Tuesday.

At the same time, the government is trying to build a sound ecosystem for the rapidly expanding industry, said Shang Bing, vice-minister of the Ministry of Industry and Information Technology, the regulator of the country's Internet market.

"The nation did a good job in upgrading broadband Internet infrastructures and supporting the development of Web-based services last year," said Shang, adding that the preparation of legislation for the Internet industry is seeing healthy progress.

The number of Chinese Web users reached 590 million by the end of June, with nearly 80 percent of people logging onto the Internet on mobile devices such as smartphones and tablets, said the China Internet Network Information Center, a government think tank.

Driven by the increasing demand for online shopping, gaming and location-based services, the nation is on track to challenge the United States as the world's top Web market, experts said.

As an increasing number of Chinese companies are willing to implement cloud computing, and state-of-the-art data analytical applications and there's an increasing penetration rate of mobile devices, China is in a leading position before the next industry transformation wave comes, said Ralph Haupter, the head of Microsoft Corp's China unit.

"In addition, as the government pledged to build an Internet network that will cover at least 75 percent of Chinese families by 2015, I think that China's Internet industry will undergo a smooth transformation," he said.

The mobile Web segment has seen a strong M&A boom since the beginning of the year, indicating that the sector may replace the traditional Internet market and become the most active front of the industry.

On July 16, Baidu Inc said it would buy mobile app store 91 Wireless Websoft Ltd for a record $1.9 billion.

Less than three months ago, the Chinese online search provider spent $370 million to buy PPStream Inc's online video business in a bid to challenge top video platforms, such as Youku Tudou Inc.

E-commerce giant Alibaba Group Holding Ltd is also planning to grab a share of the mobile sector. The Hangzhou-based company spent $880 million to invest in the country's top micro-blogging portal Weibo.com and in navigation company AutoNavi Holdings Ltd earlier this year.

But not every company is set to enjoy the "smooth" transformation of the industry as an increasing number of Internet players are shifting their businesses to the mobile Internet sector, analysts warned.

"Large M&A deals boomed this year partly because Chinese Internet companies are fighting hard for a better position in new areas. The most efficient way to beat a competitor is to purchase it," said Yu Yang, CEO of Beijing-based research firm Analysys International.

The number of acquisition deals also depends on the US capital market's attitude toward Chinese IT startups. Before the global economic downturn, New York was one of the most favored places for Chinese Web company IPOs.

When the US capital market is ready to welcome Chinese startups again, the M&A frenzy may see a pause because founders of smaller Internet companies will have an alternative, rather than just selling their firms to bigger players, said Yu.