China is tightening its grip on a surge of peer-to-peer (P2P) lending amid a string of mismanagement and fraud in the lightly regulated sector.

By doing so, Beijing is aiming to limit the potential instability these lenders might pose to the country's wider economy and society.

In some cities, investment firms and online lenders have been ordered to break leases and close their storefronts. In addition, the registration of all new firms with finance-related names was suspended nationwide last month, said media reports, as more of such firms faltered.

The move comes as the number of P2P lenders - mostly websites that connect borrowers to lenders - proliferated over the past few years as small firms, unable to get bank loans, flocked to such platforms for alternative funding.

Investors seeking alternatives to the volatile stock market also made it one of the fastest-growing segments in China's financial system.

There were 2,600 platforms as of the end of last year, up from 880 at the start of 2014, according to Chinese data firm Wind Information. While some extend credit on reasonable terms to small businesses, others might be loan sharks, charging illegally high interest rates to borrowers desperate for short- term funds.

Lending in the segment hit 982 billion yuan (S$207 billion) last year, soaring from 253 billion yuan in 2014, making China's P2P market the world's largest.

But the explosive growth in the loosely regulated sector has led to a host of problems.

Almost 1,000 online lenders, for instance, have been shuttered in the past year. In some cases, senior executives have fled as financial problems surfaced at their firms, while others are outright frauds.

P2P lender Ezubao, for instance, collapsed last December after investigations exposed it as a Ponzi scheme - and one of China's biggest fraud cases.

The online financing platform, which pitched high-yielding returns of up to 15 per cent even as the Chinese economy sputtered, owed more than 50 billion yuan to 900,000 investors, setting off protests in Beijing and several other cities when it imploded.

Experts say a comprehensive set of regulations and enforcement are sorely needed to bring order to China's Internet finance industry.

Last December, the banking regulator released draft rules that included banning P2P lenders from selling certain high-yielding products and providing guaranteed returns.

Ms Ng Zhi Ying, an analyst with research firm Forrester, said the shutdown of Ezubao - and the arrest of 21 suspects linked to the firm - is significant as it signals Beijing's resolve.

"Many P2P lenders with unsound business models have operated for years without backlash, violating regulations with impunity... These unstable platforms were simply ticking time bombs," she noted.

Some experts say the industry is also taking steps to clean up its act in light of the negative publicity.

Mr Zennon Kapron of Shanghai-based financial research firm Kapronasia said China's larger P2P platforms are now doubling down on internal controls and business practice reviews.

But the P2P lending sector is unlikely to pose wider risks as it remains a relatively minor contributor to overall credit growth in China, experts say. Rather, it is the social fallout that could lead to a bigger impact - and is likely one of Beijing's main concerns - as more small investors find themselves victims of fraud.

A recent report by Moody's credit rating firm said: "While (P2P lending) does not pose systemic risks given its small size, it has attracted attention for its high default rates, and because it carries the risk of social tensions, given the large presence of retail investors."