China's regulators will launch a fresh investigation into stock margin trading, and banks have been told to tighten supervision of their lending practices to ensure loans are not funnelled into stock markets, three sources said. The news comes as Beijing moves cautiously to suppress the excessive use of debt to make aggressive bets on the stock markets. Regulators are generally supportive of the recent stock market rally, as it has proven to be one of the few bright spots in its financial markets in recent months, as house prices slide and yields on fixed-income products come under pressure. However, it is also seen as becoming disconnected from economic fundamentals and company earnings. "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," one of the sources said. That concern led to the punishment of three of the country's largest brokerages for improper allocations of trading margin earlier this month. At the same time, banking regulators made moves to curb abuse of short-term forms of credit in the interbank market. Reports of previous investigations and regulatory clampdowns caused a dramatic plunge in stocks on January 19, with main indices tumbling more than 7 per cent in a single day. Regulators followed up by reassuring the market that they were not trying to suppress the rally, but while markets recovered, so did the usage of leverage for margin trading, which hit a record high of 778 billion yuan (HK$979 billion) on Tuesday. "Some brokerages have borrowed short-term money but lent as long-term loans, facing relatively high liquidity risk," China Securities Regulatory Commission chief Xiao Gang said in a report on the CSRC website.