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China regulator to inspect stock margin trading at 46 firms

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China's stock regulator will inspect the stock margin trading business of 46 companies, the official Xinhua news agency said, amid concerns that the country's stock markets are becoming over-leveraged and vulnerable to a sudden reversal.

Sources told Reuters on Wednesday that Chinese regulators would launch a fresh investigation into stock margin trading, and banks have been told to tighten lending supervision to avoid loans being funneled into stock markets.

"The inspection belongs to normal regular supervision and should not be over-interpreted," Xinhua said late on Wednesday, quoting the China Securities Regulatory Commission (CSRC).

What to take note when investing in China stocks

Chinese stocks have climbed by around 40 percent since November, raising some concern that the rally is out of step with a marked slowdown in the world's second-largest economy. The tide of money into stocks follows a recent cut in interest rates and a weak property market, which is traditionally a strong investment destination for household savings.

The outstanding value of margin loans used to purchase shares has hit record highs for the past three days, reaching 780 billion yuan ($124.5 billion) on Wednesday.

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The CSRC punished three of the nation's largest brokerages this month for illegal conduct in their margin trading businesses. At the same time, banking regulators moved to curb abuse of short-term forms of credit in the interbank market that were seen as being used for stock market speculation.

Reports of previous investigations and regulatory clampdowns caused a dramatic plunge in stocks on Jan. 19, with main indexes tumbling over 7 percent in a single day.

Regulators followed up by reassuring the market they were not trying to suppress the rally, one of the few bright spots in Chinese capital markets.