China is readying twin initiatives to curb opaque financing practices that threaten the stability of its US$864 billion investment trust industry and booming corporate paper market, sources with direct knowledge of the plans said.

The moves, coming separately from the People's Bank of China and the China Banking Regulatory Commission, form part a campaign to clean up China's financial system as it opens up domestic capital markets to diversify funding options for cash-strapped firms in the world's No. 2 economy.

Two sources close to the CBRC said China's big-four managers of bad loans - so-called asset management companies - will be banned from lending directly to investment trust companies under the pretext of acquiring bad debt.

Meanwhile, continuing a clampdown on the corporate bill that began in 2011, the PBOC will, from next year, stop bankers acceptances and similar products from being used to camouflage off-balance-sheet lending to firms, sources with direct knowledge of the situation said.

Trade in commercial bills began to cause concerns in the country when the economy showed signs of overheating on a flood of cheap credit in 2010 and issuance of such notes exploded.

Neither the CBRC nor the PBOC commented on their plans yesterday when contacted by Reuters.

The initiatives could provide reassurance that China is serious about rooting out hidden risks that investors fear lurk in a financial system dominated by state-controlled banks and government-backed business.

For years, China has shuffled bad debt that was chalked up by big state companies between state banks, other state companies and the government in labyrinthine deals that hid the cost of bad banking, and shielded unviable state enterprises from bankruptcies.

These losses lurk in the system unaccounted for, tarring banks' and China's fiscal health, and frustrating potential investors who say China quashed the bad debt market by refusing to sell dud loans openly to protect state firms from creditors.

The new rules target two key areas - real estate and lending to China's biggest, mainly state-backed, firms.

"Right now, asset management companies are focusing their main acquisitions among property trusts," one of the sources with knowledge of the CBRC plan said. "The new rules are obviously targeting areas in the property trust sector vulnerable to problems."

Property trusts absorb nearly 13 percent of China's total trust investment and have been pressured in the past year as falling home sales strain developers' ability to repay loans.

Some developers have sold land or half-finished projects held as collateral with trusts to repay debts, with the four asset management companies emerging as buyers, Chinese media have reported.