Growing jitters about the financial health of bloated industries in China have prompted many banks to cut lending in these sectors by as much as 20 percent, banking and industry sources with knowledge of the matter said.
At the same time, the China Banking and Regulatory Commission (CBRC) has called on banks to submit their regular report of outstanding loans owed by various sectors, but has asked them to include loans linked to derivative products and debt financing, the sources said.
The inclusion of these two areas is a "new development", said one banking source.
The move, which comes in the wake of a landmark corporate bond default by Chaori Solar as well as the default of a coal-related high-yield trust product, underscores the regulator's concerns about financial risks posed by heavily indebted sectors, such as steel makers and shipbuilders.
"The specific sectors to be audited are steel, cement, aluminium smelting, flat-glass and shipbuilding," said another bank source, who received a CBRC document outlining the requirements.
It was not clear what derivatives lending or debt financing the CBRC was focusing on.
But the sources said one area of concern may be bank lending to clients who used commodity imports such as steel or copper as collateral.
The prices of both metals have tumbled, partly in response to growing debt concerns in China following the Chaori default.
Beijing has tried to crack down on industrial sectors with surplus production capacity for much of the past 10 years, but with little success.
They are now feeling the heat as the government tries to restructure the economy. Beijing relied for years on investment and exports to fuel double-digit growth but is trying to shift towards an economy more reliant on consumption and services.
That change has involved a string of measures aimed at ensuring uncompetitive industrial producers are forced to shutdown.
China's cabinet, the State Council, has said that credit must be cut to these sectors and that no new project approvals are allowed until 2017.
Beijing has also seized the opportunity to raise environmental requirements on highly polluting industries, putting more pressure on their operating costs.
The CBRC has not set any targets for a reduction in lending, but banks started to cut loans to struggling sectors late last year, banking sources said.
Some steel mills received letters from their banks this month telling them that their 2014 credit limit would be 20 percent below the amount they borrowed in 2013, industry sources said.
A source at mid-sized Shanghai Pudong Development Bank said it had already significantly scaled back lending to shipbuilders.
"Beijing has already given enough warning that they are cracking down on these sectors and many of them are already in dire straits," said another bank source.
"With steel prices tumbling, many of these mills and trading houses are having a really bad time. Everyone knows that and we are taking steps to reduce our risks," this source said.
The squeeze has already caused a cash crunch for smaller steel mills and some commodity traders, especially in steel and iron ore.
Some 16 steel mills in the top producing province of Hebei, around Beijing, have stopped production due to financial troubles, provincial governor Zhang Qingwei said last week. Some mills in northern Jiangsu province have also closed down.
For firms who used those commodities as collateral to get loans, the tumble in local steel rebar and iron ore prices this month has led to margin calls, sparking a wave of panic selling by firms who needed to repay loans, traders said.
Iron ore for immediate delivery to China fell 8.3 percent on Monday, the largest one-day percentage fall in 4-1/2 years, to $104.70 a tonne, data compiled by the Steel Index shows. It was at $107.40 on Wednesday.
Traders estimate as much as 30 percent of China's iron ore stock piles, which reached a high of 86.8 million tonnes in January, is tied to financing deals.
While refined copper is also a popular financing tool, the sharp drop in prices has not led to panic selling because banks required companies to fully hedge their exposure on the London Metals Exchange when they issued these trade loans.