The banking regulator believes 90 percent of personal credit extended by banks is being channeled illegally into the stock market, Reuters quoted an unidentified CBRC official as saying.

"CBRC has made it clear that it will investigate the problem of misuse of bank loans for stock market speculation and prevent the risks in the capital market from transferring to banks," Fan said recently at a financial forum in Beijing.

The regulator's determination to stop the irregularities in bank loans, analysts say, will help the market develop in a stable and healthy way a necessary step to pre-empt a huge financial risk.

"It (the move) may exert a downward pressure on the market in the wake of last week's sharp fall as it will force some of the funds out," said Zhao Xinke, a professor with Shanghai-based China Europe International Business School.

"But it is a necessary step for the sake of the long-term health of the market and financial stability," Zhao said.

The Shanghai Composite Index tumbled 5.6 percent last week. It plummeted 8.8 percent last Tuesday, the steepest drop in a decade.

But most analysts now say the massive fluctuation was mostly a technical correction of previous gains, and not a turning point for the boom period.

"Speculative funds are always seeking short-term profits and this will only add to market volatility," said Han Meng, an economist with the China Academy of Social Sciences.

"More seriously, the inflow of bank loans into the stock market will brew huge potential risks for both banks and the borrowers themselves," the economist said.

"As those misused loans are usually short term, once the market tumbles, it may lead to a financial meltdown."

1

2

(For more biz stories, please visit Industry Updates)