The People's Bank of China will regulate the fast-growing Internet finance sector more carefully, but it won't crack down on it, the head of the central bank said on Tuesday.

PBOC Governor Zhou Xiao-chuan made the comment on the sidelines of the annual session of the National Committee of the Chinese People's Political Consultative Conference. It was Zhou's first comment on Yu'ebao, a popular but controversial online fund offering, and its Internet competitors. He didn't give any indication of what steps the PBOC will take — or when. What, if any actions, the government might take to regulate Internet finance has been the subject of much speculation as China's lawmakers gather this week in Beijing to discuss social and economic policies.

The growth of online financial products, such as Yu'ebao, an investment service offered by Tian Hong Asset Management Co Ltd and Alipay (an e-payment division of Alibaba Group Holding Ltd),is being closely watched by the banking industry and the Internet sector. Some praise it as an innovation. Others condemn it as a threat to traditional banks.

Yu'ebao, which offers consumers a way to invest their idle cash in money market funds with higher returns than typical bank deposits, has become widely popular with the public, although some financial experts have warned of possible risks. Since it was launched in June 2013, Yu'ebao has attracted 81 million customers, with aggregate deposits estimated at 500 billion yuan ($81 billion).

Although it said that online financial products are an innovation that promotes interest rate liberalization, the China Securities Regulatory Commission has also said it noticed illegal promotion and advertising activities by fund management companies. "Some of them don't fully disclose potential risks to investors, and some don't have quality risk management systems," Zhang Xiaojun, a spokesman for the CSRC, said on Friday. Zhang said at the time that the CSRC will draw up special regulations covering the online sale of financial instruments and mandating tighter risk controls for money market funds.

Yi Gang, vice-governor of the central bank, said the PBOC will closely monitor market conditions to head off risks. Yi warned investors to make careful choices. Ding Xuemei, a spokeswoman for Tian Hong Asset Management, told China Daily that the company welcomes regulatory scrutiny. "With more and more online financial products emerging in the market, it is important to strengthen regulation of the sector. "We've always put risk control and stable development on top of our agenda. Sometimes, we even sacrifice extremely high returns to team up with better and more qualified partners," said Ding.

Ding's comments come amid a decline in the interest rates on many Internet finance products. Yu'ebao was offering a seven-day annualized yield of 5.92 percent on Monday, the first time its annual yield had fallen below 6 percent.

The seven-day annualized return of Tencent Holdings Ltd's Licaitong, an online financial product embedded with the company's mobile messaging app WeChat, was 6.01 percent on Monday, down from its peak of 7.8 percent in late January. Wang Dengfeng, the fund manager of Yu'ebao, said it's only natural that rates for online financial products would decline since the end of the year, when Chinese banks see deposits weaken. "Based on market conditions, it is normal for the annual yield on Yu'ebao to return to about 4 percent," said Wang.

Even with lower returns, online financial products such as Yu'ebao still have some advantages over traditional banks, such as convenience and flexibility, said Wang Weidong, an analyst at iResearch Group, a Beijing-based consulting firm.

"Some banks also launched similar services to allow clients to use money market funds, but it is still easier for people to buy the funds from Yu'ebao or another Internet company because of the streamlined buying process. "Moreover, the purchasing threshold for those online financial products is next to zero," he said. Xinhua contributed to this story.

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