(Yicai) Oct. 10 -- In the wake China's stock market rally, which has seen low-interest consumer loans used to buy shares, banks have been reminding customers that borrowing to fund anything other than what was agreed will result in the loans being cancelled.

Lenders are monitoring fund flows in borrowers' accounts, a number of banking industry insiders told Yicai. If it is found that consumer loans are not being used for the agreed purposes, the banks will pull them immediately. One joint-stock bank found that some consumer loans are not being used properly and is investigating further, a representative said.

Applying for a consumer loan is straightforward, requiring only basic personal information, several loan brokers said. Enquiries have shot up recently, one pointed out.

An investor in Jiangsu province applied for low-interest loans from several banks before the week-long National Day holiday earlier this month and invested all of it in the stock market, he told Yicai. Another young investor said he put CNY500,000 (USD70,780) in the stock market, using cash and a consumer loan from a bank.

Chinese stocks have surged since Sept. 24, thanks to a big economic stimulus package the government rolled out. External funds poured into the market and by Oct. 8 the Shanghai Composite Index had climbed 33 percent. Later that same day, however, the major indices began to pull back noticeably.

Some investors told Yicai that many loan brokers are taking advantage of the higher demand by offering to help them secure consumer loans to invest in stocks without the banks finding out. To entice people, brokers are even using phrases such as “take advantage of the bull market to make a quick profit.”

The flow of funds from low-interest consumer loans into the stock market is essentially a form of leveraging, said Wang Pengbo, chief financial analyst at US technology firm Broadcom. If the stocks fall, investors’ losses will be magnified due to having to pay back the loan. That could also lead to an increase in non-performing loans for banks and a decline in asset quality, Wang noted.

Editors: Tang Shihua, Kim Taylor