The inadequate monitoring of loan use demands improvement, otherwise creditors will suffer losses and systemic risks will build, the CBRC said in a statement on its website.

"Our purpose was to prevent it happening," the statement said.

Ba Shusong, a researcher with the Development Research Center of the State Council, China's cabinet, said the new rules will further strengthen credit risk controls and put a "brake" on lending and keep the financial system in good health,

Guo Tianyong, a professor with the Central University of Finance and Economics, said the new directive will prevent systemic risk after the rapid expansion in credit.

Although the CBRC and the nation's central bank have repeatedly warned banks to maintain an even pace in lending growth and to avoid big fluctuations, new yuan loans hit a massive 1.39 trillion yuan in January, as banks scrambled to lend before an expected tightening in credit later in the year.

CBRC chairman Liu Mingkang said on Jan. 27 the Chinese government is aiming to restrict credit supply to 7.5 trillion yuan (about 1.1 trillion U.S.dollars) in 2010.

Analysts expect short-term loans to fall significantly on account of tougher lending requirements that prevent businesses using new loans to repay old credit, a phenomena rampant when bill financing with 180-day maturity comprised nearly half of new loans in the first quarter of 2009.

To soak up the excess liquidity on the heels of lending spree, China has raised the deposit reserve requirement ratio (RRR) twice this year, after holding it steady for over a year, to handle the "comparatively loose liquidity" while keeping the "moderately easy" monetary policy unchanged.

Jing Ulrich, Chairman of China Equities and Commodities at JP Morgan Chase, estimated China's new lending would fall 17 percent this year as the government takes steps to prevent inflation.

"While lending support for real economic activity is expected to continue, banks are likely to be more vigilant on shorter term credit facilities, given the regulator's anxiety over asset bubbles and capital adequacy ratios," she said.