China’s cabinet imposed new controls on the multi-trillion-dollar shadow-banking industry with an order that targets off-the-books loans and shores up enforcement of current rules, two people familiar with the matter said.

The rules include a ban on transactions designed to avoid regulations, such as moving interbank loans off balance sheets to reduce reported levels of lending, said the people, who asked not to be identified because the order hasn’t been made public. Such operations are part of shadow finance, a term that describes lending outside the banking system. In a separate step to reform the system, the bank regulator said it will let as many as five privately owned lenders start operating this year.

The Cabinet order shows concern at the highest levels of government that shadow banking, estimated by JPMorgan Chase & Co. at 69 percent of China’s 2012 gross domestic product, may threaten the financial system’s stability. Premier Li Keqiang is seeking to reduce the risk of defaults by cutting leverage in the world’s second-largest economy, where growth last year may have slowed to the weakest pace since 1999.

“Many money-losing industries have been relying on such financing to roll over their debt,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said by phone Monday. “Currently, most of China’s shadow banking is a result of banks’ interbank business that is designed to take advantage of regulatory loopholes and ends up pushing up leverage in the whole financial system.”

In the new regulations, sent to ministries and local governments last month, the cabinet ordered tighter enforcement of current rules on shadow finance, the people said. The new directives also include a ban on using third parties to evade restrictions on lending directly to certain borrowers, according to the people. The government restricts lending to property developers as part of a campaign to control home prices.

The State Council Information Office didn’t respond Monday to a faxed request for comment. JPMorgan estimates the industry’s value at 36 trillion yuan ($5.9 trillion).

China Business News reported Monday the country formally issued rules on shadow banking and clarified the definition of the business for the first time. The report cited a person familiar with the matter who wasn’t identified.

Shadow banking includes activity ranging from trusts to banks’ off-balance-sheet savings vehicles, known as wealth management products, and private lending between individuals. A lack of transparency has made it difficult for the government to control the level of credit in the economy, while increasing the risk of default. (Bloomberg)