The suspension of new margin accounts at three of the nation's biggest brokerages and notice to ban loans to traders with less than 500,000 yuan has done little to dampen leveraged investors. After falling 7.7 per cent on January 19 in the biggest one-day rout since 2008, the Shanghai Composite Index hit a five-year high on Monday.

"Margin debt is still growing rapidly and is probably against the will of the regulators," said Hao Hong, a strategist at Bocom International. "The regulator wants market stability but is also trying to find a way to rein in speculation. It is between a rock and a hard place."

On January 16, the China Securities Regulatory Commission banned Citic Securities, Haitong Securities and Guotai Junan Securities from adding margin finance and securities lending accounts for three months following rule violations. It also said securities firms should not lend to investors with assets of less than 500,000 yuan, prompting the biggest drop in the margin debt balance in Shanghai in 19 months.

The market fell 0.89 per cent yesterday after data showing a slump in industrial companies' earnings. The market is still up 65 per cent over the past 12 months.

The regulator said on January 19 it was not trying to curb equity trading. Policymakers took action "to protect investors' rights and support the healthy growth of margin trading", CSRC spokesman Deng Ge said.

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors' equity holdings, meaning they may have to sell when prices fall to repay their loan.

"There is obvious demand for margin debt," said Gerry Alfonso, at Shenwan Hongyuan in Shanghai. "Investors seem to continue to be bullish on the market."