A new regulation placing restrictions on online payment providers with foreign investors is causing a headache to some of the leading Chinese Internet players.

Under the new regulation firms like Alibaba - which operates the world’s largest online marketplace for trade between businesses and China’s largest retail e-commerce platform – would finally be allowed to provide third-party online payment services.

The problem? Companies with foreign capital are excluded from the new regulatory framework. Alibaba’s AliPay (70% of the marketshare) counts Yahoo and Softbank among its shareholders. Many other Chinese Internet players who created offshore investment shells have similar foreign investor arrangements. In other words, the regulation which would have strengthened the local player ChinaPay and pre-empted Paypal has far broader implications: many Chinese Internet players will have to restructure their shareholding.

Wait a second…. Didn’t China Mobile, eager to get a pie of the online payment business, just recently take a minority in a domestic bank?