China's markets regulator has started probing mutual funds for illegal activity, an unnamed source told the respected China Business News.

The country's regulators have been cracking down on illegal stock trading, "malicious" short-selling and insider dealing since bourses fell sharply in mid-June.

The investigation by the China Securities Regulatory Commission (CSRC) may include some brokerages and will involve a wide ranging audit which is expected to conclude before the end of this year, the source told China Business News.

The investigation is in its early stages, but the CSRC plans to announce details this month, the source said.

The CSRC was not immediately available for comment.