Chinese regulators will launch a fresh investigation into stock margin trading, and banks have been told to tighten lending supervision to avoid loans being funnelled into stock markets, three sources with direct knowledge of the matter told Reuters.

The China Securities Regulatory Commission and the ChinaBanking Regulatory Commission did not respond to a request from Reuters seeking comment.

The news comes as Beijing moves cautiously to suppress the excessive use of debt to make aggressive bets on Chinese stock markets, which have gained around 40 percent since November.

The probe will focus on brokerages not investigated in a previous crackdown, one source told Reuters. It will target houses that have ignored regulatory curbs, especially a requirement for investors to have an active brokerage account for six months before beginning margin trading.

The previous crackdown in early January saw three of China's largest brokerages temporarily suspended from taking new business, as a punishment for improper use of margin credit.

The second round of investigations in margin trading is expected to run two weeks from next week until Feb 16, one source told Reuters.

Chinese regulators are generally supportive of the recent stock market rally, as it has proven to be one of the few bright spots in financial markets in recent months, as house prices slide and yields on fixed-income products come under pressure.

However, the rally is also seen as becoming disconnected from economic fundamentals and company earnings as the world's second-largest economy looks set to see growth slow further in 2015.

Mainland stock markets have seen dramatic crashes in the past, but the risk has been amplified this time around, given liberalisations made to the way brokerages can allow investors to bet using borrowed funds. 

Since retail investors do most stock market trades in China, the prospect of a crash similar to that following a 2009 rally is worrisome, both in terms of potential wealth destruction and political fallout if the legions of new investors who jumped into the market find themselves abruptly and deeply in debt. 

"Regulators have been signalling since November and December that they were worried about the direction of investment, requiring banks to investigate and ensure liquidity didn't flow into the stock market," said one of the sources.

That concern led to the punishment of three of the country's largest brokerages for improper allocations of trading margin earlier in January. At the same time, banking regulators moved to curb abuse of short-term forms of credit in the interbank market that were similarly seen as being used for stock market speculation. [ID:nB9N0SU025]

Reports of previous investigations and regulatory clampdowns caused a dramatic plunge in stocks on Jan. 19, with main indexes tumbling over 7 percent in a single day.

Regulators followed up by reassuring the market they were not trying to suppress the rally, but while markets recovered, so did the use of leverage for margin trading, which hit a record high of 778 billion yuan ($124.5 billion) on Tuesday. 

"The impact of industry overcapacity, local government debt, shadow bank and property risk on the capital markets is not negligible," China Securities Regulatory Commission chief Xiao Gang said in a report on the CSRC website. The comments were made to an industry conference in Beijing earlier in the month.

"The scale of margin trading has grown rapidly, exceeding 1 trillion yuan by the end of 2014, with trading leverage rising obviously. Some brokerages have borrowed short-term money but lent as long-term loans, facing relatively high liquidity risk."