China’s equity slump is beginning to take its toll on the country’s shadow financing system, responsible for much of the margin lending that had fuelled the bull market. Underground lenders — one of the least regulated parts of China’s informal banking system — reported a sharp rise in bad debt from consumer credit and margin loans in June as equity prices headed south.

In its monthly survey of underground lenders, FT Confidential Research talks to about 70 registered micro credit firms and unregistered personal lenders with monthly lending volumes of Rmb1m ($160,000) and above.

These companies have reported a sharp rise in demand for margin loans and consumer credit so far this year, as individuals leveraged up to take advantage of soaring share prices. In the first six months of 2015, an average of 32 per cent of the underground lenders surveyed said that financial-market-related loans — mainly margin lending — comprised one of the biggest sources of demand for loans, up from just 4 per cent in 2014. An average of 24 per cent said the same of consumer credit, up from 6 per cent of respondents in 2014.