BEIJING -CHINA'S banking watchdog has vowed to tighten supervision over the use of new loans in an effort to prevent credit being diverted into the stock and property markets, state media reported on Friday.

'We will strengthen supervision and control on the use of credit,' Wang Huaqing, a leading official at the China Banking Regulatory Commission (CBRC) told the central bank-run newspaper Financial News.

'We will impose effective tracking and checks ... to prevent credit from being illegally funnelled into the stockmarket and the property market.'

Chinese banks, keen to heed Beijing's calls to support economic growth and fund government-backed projects, extended a record 7.73 trillion yuan (S$1.58 trillion) in new loans in the first seven months of the year.

The aggressive lending has sparked concerns that some of the money has not been used to help the real economy, but has instead been put into asset markets for quick profit.

The country's stock market surged 90 per cent in the first seven months of this year before tumbling nearly 20 per cent in the past month. Home purchases in major cities also hit record highs in recent months.

A slowdown in lending would not hurt the overall growth of the economy, Chen Xiwen, deputy director of the Office of Central Financial Work Leading Group, told Dow Jones Newswires.

Banks rushed to lend in the first half, but not all of the lending went into the real economy, he said, adding it will take time for the loans to be digested.

Regulators have raised concerns over credit risks and pledged to strengthen supervision and introduce stricter capital requirements.

The CBRC warned some mid-sized lenders on Thursday that their capital adequacy ratios had dropped to near the minimum requirement of eight percent due to excessively fast growth in some of their business, the China Daily reported.

It has also proposed stopping banks counting cross-held subordinated debt as part of their capital, spurring fears they could be forced to cut back lending or issue new shares to meet capital-adequacy ratios. -- AFP