The Chinese central bank has instructed the country's lenders to rein in new loans, particularly mortgages, in the first quarter to offset excessive leverage in the financial system, Bloomberg News reported Jan. 26, citing "people familiar with the matter."

The People's Bank of China may punish banks which fail to comply with the new lending rules by lowering interest rates on reserves, according to sources. The central bank may also make errant lenders pay more for deposit insurance, one of the sources said.

The rules include a request for banks to keep any rise in new mortgage lending in the first quarter below the increase seen in the fourth quarter of 2016. The growth rate of total outstanding mortgages should also not surpass the fourth-quarter rate, the sources added.

The central bank refused to comment on the report, Bloomberg said.

Policymakers are seeking to find a balance between preventing excessive credit and keeping enough funding in the financial system to meet the increase in demand for credit before the Chinese New Year holiday. In December 2016, China's president Xi Jinping and his top economic deputies reasserted their plan to control financial risks to prevent asset bubbles.

Banks have made a record 12.65 trillion yuan of new loans in 2016 alone, with majority of the loans in the first quarter of the year so they could record the interest income earlier. The central bank also unexpectedly raised medium-term lending facility rates to maintain basic stability in the banking system.

As of Jan. 26, US$1 was equivalent to 6.88 Chinese yuan.