Mix the mainland's red-hot stock market with its opaque shadow lending industry and the result could be a new level of risk in the mainland financial sector. Shadow banking, a sweeping term for off-balance-sheet bank lending that ends up at trust companies or in wealth management products, is falling as a proportion of bank activity. Traditional bank lending accounted for 84 per cent of total social finance last month, up from 82 per cent in December, as off-balance-sheet lending shrank. Yet, while the numbers are falling, increased connections with the stock market have greatly shifted the risk profile of shadow banking, according to Moody's Investors Service. "What we are fairly confident about is that securities companies are raising funds through what are essentially repo loans and investing in the equities market," said Michael Taylor, managing director for credit policy at Moody's in Hong Kong. Leveraged bets on stocks using money borrowed from brokers, known as margin lending, are used as collateral on one-year bank loans, indirectly tying bank funding to the stock market. Trust companies, too, are shifting assets into the stock market, a Moody's report showed. The companies have traditionally taken loans from banks and invested in real estate or infrastructure projects. More recently, the Shanghai Stock Exchange, which has soared by nearly 90 per cent since October, has attracted trust assets. Moody's data showed trust investments in property and infrastructure falling from about 50 per cent in 2011 to about 30 per cent last year, with funds moving to financial institutions and the securities market ballooning to about 25 per cent. Interconnections between shadow bankers and the capital markets are murky at best. Data shows off-balance-sheet lending at financial leasing companies, many of which are subsidiaries of banks, has since 2010 hit more than four trillion yuan (HK$5 trillion) last year. But information on how much flows into margin finance in the stock market was largely unavailable, Taylor said. The risks are a bit clearer. Leveraged stock investments have jumped to 1.8 trillion yuan from 400 billion yuan a year ago, according to Gavekal Dragonomics analyst Chen Long. Because brokers have driven some of that growth with loans from the interbank market, a stock market correction could mean serious losses at banks, he said. "The contagion effect will be much greater than in previous cycles, since the banking system is now more exposed to the brokerage industry," Chen said in a report this week. "If any brokers get into trouble, banks may end up taking losses as well."