In the first week of July, Yuan loans extended by China's big four state owned banks reach a hefty US$27.7 billion. The amount was unusually large said the official Shanghai Securities News said on Thursday. The loans may alarm regulators trying to strangle distorted credit growth.

The rapid lending of Chinese banks early in June also caused the central bank to set off an acute liquidity squeeze in the country's interbank market.

A panic was caused among money dealers provoking a dramatic decline in domestic equity indexes. International concerns were also raised regarding the health of the country's financial system.

According to traders, the People's Bank of China convened a meeting where banks were warned about aggressive lending. The meeting also pointed out that some banks borrowed short term money on the money markets and used it to extend medium and long term loans. This would mean a mismatched of assets and liabilities that would lead to an increased systematic risk.