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Worried over the alarming rise in real estate prices and a ballooning credit bubble, China’s central bank on Monday told the country’s top lenders to improve their balance sheets and to reel in risky loans.

This was the first message from the country’s financial authority regarding the credit squeeze. Lending rates started to ease on Monday, but China bank stock prices tumbled and the Shanghai Composite shed 5.3 percent.

According to a translation of a People’s Bank of China statement dated June 17 but made public on Monday, the bank said “Currently, liquidity in our country’s banking system is overall at a reasonable level . . . [but] Commercial banks should pay close attention to the market liquidity situation”. (The statement can be found here in Mandarin.)

The news comes after short-term lending rates in China were already at record highs last week. Banks have been charging record high rates to lend money to each other as the government moves to squeeze out liquidity. The interbank lending rate declined to 6.489 percent from 8.492 percent on Friday, reported the New York Times. Overnight lending hit a record high of 13.44 percent last week while the seven-day repo rate hit 25 percent.

"We believe this is another sign that the central bank is not willing to loosen policies or inject liquidity to bring down interest rates ... and suggests that the central bank's policy stance remains tight," said Zhang Zhiwei, chief China economist at Nomura Securities, in a research note published by Xinhua news agency.

All Chinese bank stocks took a substantial hit in Monday trading, led by China Minsheng Banking Corp Ltd (HKG:1988), which tumbled more than 8 percent. The Hong Kong bourse closed down 2.22 percent.

The target of the central bank’s move is shadow banking, unregulated financial intermediaries involved in providing credit from regulated financial institutions, which is believed to be doling out large and risky loans to businesses and local governments.

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