With Chinese banks' record new lending in 2009 igniting fears about asset bubbles and bad loan, the banking regulator's latest rules aim to bring financial risk under control.

The new directives order banks to focus on loan quality control, rather than quantity restriction, and aim to make loans flow to the real economy -- rather than the property and stock markets, which are susceptible to asset bubble formation.

Analysts say the directives are a smart way to handle the policy dilemma the central bank faced: with inflationary pressures growing after increased money supply, how can monetary policy be tightened without hurting the fragile economic recovery?

The China Banking Regulatory Commission (CBRC) issued new regulations on Saturday evening telling banks to set lending quotas after "prudent calculation" of borrowers' "actual demand".

It also reiterated working capital should not finance fixed-asset investment and equity stakes. The new rules also ask lenders to give funds directly to the end user declared by the borrower, instead of directly giving it to the debtor, in an effort to ensure loans are used for their declared purpose.

Execution of the directives will help banks exit the "credit stimulus spree", as they pay more attention to risk control. The directives are crucial for the banks' sustainable expansion, said Yu Xiaoyi, analyst with Guangfa Securities.

Loose oversight and easy monetary policy have led to many banks developing the bad habit of being excited about loan extension but indifferent to the tracking of loan use, which can result in credit appropriation, an unnamed insider told Xinhua.

That allowed many Chinese enterprises to borrow much more than they needed in order to speculate with various types of investment, even though they had ample funds on hand for their routine business operations.

In support of the government's 4-trillion yuan stimulus package, Chinese banks lent an unprecedented 9.6 trillion yuan in 2009, nearly half of 2009 gross domestic product.

Researchers said that large amounts of the borrowed funds went into property and stock market speculation, further pushing up soaring house prices and further inflating asset bubbles.

According to official data released by CBRC, some regions reported two to three percent of funds were misappropriated.

Wang Kejin, an official with the Supervision Rules and Regulation Department of CBRC, told Xinhua "the current working capital and individual loans exceeded real market demand,"