The banking regulator said yesterday that it would strengthen its controls on loans made by banks for corporate working capital in order to make sure the money is put to proper use.

This is the second time this week that the China Banking Regulatory Commission (CBRC) announced its intentions to monitor the loan flow after targeting fixed-asset investment lending on Monday.

The publication of the draft rules came after banks churned out a record 7.4 trillion yuan worth of loans in the first half of the year, almost 25 percent of GDP, fuelling official concerns that a large proportion of the funds was flowing into the stock and property markets.

"The aim of the rule is to ensure that all the loans for working capital are used properly," said CBRC official Wang Kejin at a press conference in Beijing.

The regulator said banks must give loans to the end-recipients rather than borrowers for amounts over 10 million yuan or a single amount over 1 million and simultaneously accounting for over 30 percent of the total amounts.

Any loans to new clients or to those who are expanding should be paid directly to the end-recipients, it said.

The regulator has used this end-recipient requirement before to ensure that loans are put towards the use stated in the initial loan application and not routed to other channels.

The CBRC said banks should stop lending if a borrower's creditworthiness declines or if loans are misused.

"Lenders must agree with borrowers on a defined and legal use of the loans, and check on the use of working capital loans to avoid appropriation," the CBRC said.

On Monday, the regulators said Chinese banks must ensure that loans they issued for investment projects were actually being put to use in the real economy.

The draft working capital loan rules has been published on the regulator's website from yesterday for public opinion.

Some analysts estimate that one-fifth of the new lending has found its way into stocks, property and other asset markets, with China's benchmark stock index jumping more than 80 percent so far this year.

Liu Mingkang, chairman, CBRC, warned last week of the risk from surging bank lending, singling out the dangers of unhealthy growth in the property sector.

The market is turning from hope to anxiety on speculation that the central bank, together with the CBRC, might use the credit quotas system, an administrative measure, used before last year, to control loans and mop up excessive liquidity.

China's central bank had on Wednesday reaffirmed its commitment to a loose monetary policy.

The central bank said it would use market tools, not quota-style controls, to ensure sustainable credit growth that would support economic recovery.

In a statement on Wednesday, the People's Bank of China Vice-Governor Su Ning said the central bank "will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum."

The statement was posted on the bank's website after Wednesday's 5 percent fall in the Chinese stock market, its biggest daily drop in eight months, which was sparked in part by worries that government will push banks to restrict their lending.