China is stepping up efforts to regulate use of "virtual currency."

The move comes as concerns mount that the increasingly popular cyber money might pose a threat to the real-world financial system.

Virtual money was created by Internet companies to facilitate online payments for virtual items and services.

The government has banned the use of virtual money to buy real-world products and the practice of exchanging it into real currency - both growing businesses on the Internet.

The ban came in the middle of last month together with a halt on setting up new Internet cafes and enhanced regulation of online games.

Fourteen ministries were involved the changes, which became public knowledge this week when an official Website published the news.

The People's Bank of China was involved in the reform process and was urged to "enhance regulation of virtual currencies in online games" and "guard against any negative impact on the real financial order," according to a government notice.

"The virtual exchanges and e-commerce real-goods trading have to be strictly differentiated," the notice said.

It added that virtual money has become a hotly pursued item on the Internet, where major e-commerce sites have opened special trading zones for its exchange.

The most popular and "influential" virtual money is Q coin, created by China's largest instant messaging service provider Tencent Inc. Q coin was created for its online community and instant messenger QQ users to buy virtual items and services like cartoon icons, electronic greeting cards and games.

With a user base that reportedly takes in more than two-thirds of China's 140 million-odd Internet population, the Q coin has become an accepted payment method by many netizens and Websites.

Uses include purchasing software downloads, music and movies, and sometimes real goods. For instance, one site that sells sex-health medicine allows buyers to pay in Q coin.

"It's convenient and safer than paying by bankcard online," said Dai Weihui, a professor with Fudan University specializing in e-commerce study.

"It has become sort of a 'universal equivalent' among traders, but in fact it's not, for it can't be converted into the real money through legal exchanges."

However, e-commerce sites have provided a place for Q coin owners to cash in. On Taobao.com, China's most popular online auction site that accounts for more than 60 percent of consumer-to-consumer trading, more than 500,000 yuan (62,500 U.S. dollars) worth of Q money is traded each day.

Apart from Q coin, there are other variations of virtual money in circulation on the Internet, but they are much less popular.

Baidu.com Inc, China's most popular search engine, once proposed that different virtual money be exchanged through its Baidu coin, but to no avail.

Dai estimated that there is 10 billion yuan worth of virtual money being traded each year in China and the trading volume is expanding 20 percent annually.

In comparison, total individual consumer spending last year was 277 billion yuan, according to the Internet Society of China.

"Large amounts of virtual currency in circulation could hurt the real-world financial system, providing opportunities for criminal activities like money laundering, and it would cause instability in the real-world money supply," said Shaun Rein, managing director of Shanghai-based China Market Research Group.

As virtual money is issued by an enterprise, not the central bank, the supply is not subject to the country's monetary policy.