The governor of China's central bank yesterday referred to the surge in domestic stock markets as a 'bubble' and promised further action to cool speculation and punish officials found guilty of improper conduct. In a wide-ranging interview with the South China Morning Post, Dai Xianglong also said the Government would act to sharply reduce the level of problem loans in the state banking system during the next five years. The governor of the People's Bank of China was concerned at the recent surge on the Shanghai and Shenzhen stock markets, which has been fuelled by small investors as well as through an influx of funds from domestic companies and banks. Mr Dai estimated that since January, small-scale investors had put up to 60 billion yuan (HK$56 billion) into the nation's sharemarkets and were poised to invest another 40 billion yuan. Beijing is concerned that a sudden fall in the stock market could leave thousands of novice investors dangerously exposed and weaken a key pillar in the Government's effort for economic reform through the promotion of private investment in stocks. It has already issued a series of measures to stabilise the market. But Mr Dai's comments are a clear signal that it is still unhappy and feels further action is needed. While he did not specify what further measures would be taken, he singled out banks as a prime source for hot money entering the local markets. 'We have banned banks from investing in stocks,' he said. 'We have imposed punishments and fines on those who act illegally in the stock market. 'We will work hard to put the stock market in order to serve the interests of the national economy. 'When the market grows too rapidly, it becomes a bubble market. Relevant departments will take measures to regularise the markets.' Mr Dai emphasised the need to overhaul the banking system and highlighted the necessity of cutting so-called 'problem loans' of major state banks which have been built up by lending money to state companies on a non-commercial basis. He estimated that 20 per cent of all outstanding loans had problems, including 'bad' loans that would never be repaid and account for two per cent of the total. This tied up billions of yuan that could be used productively to stimulate economic development. He said China aimed over the next four to five years to slash problem loans to about 10 per cent in the major state banks and six to seven per cent in new shareholding commercial banks. To do this would mean an overhaul of the banking system, including moves to make banks independent of local governments where they operate closely with inefficient state firms, he said. 'The central bank means to break the influence of local governments and stop the phenomenon of repetitive production. The branches of commercial banks should be based on economic, not administrative, areas.' Mr Dai said further lending policy should be directed towards developing large-scale industrial conglomerates and away from smaller debt-ridden companies. China would also establish 100 shareholding banks, indirectly controlled by the state, to lend to small and medium-sized companies as well as rural credit banks, he said.