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China hunts for 'manipulators' as stocks tumble

By Nathaniel Taplin and Samuel Shen

SHANGHAI (Reuters) - Chinese stocks tumbled again on Friday, taking the week's losses to more than 10 percent, as the securities regulator said it was investigating suspected market manipulation and announced a slew of measures aimed at heading off a full-blown crash.

After a slump of nearly 30 percent in Chinese stocks since mid-June, the China Securities Regulatory Commission (CSRC) has set up a team to look at "clues of illegal manipulation across markets".

After market close, a CSRC spokesman said China would cut initial public offerings and capital raisings and support long-term investors entering the market to help stabilize prices.


It also said China's official margin lender for brokerages, which makes loans available for stock market investment, would boost its capital base to 100 billion yuan ($16 billion) from 24 billion yuan to expand its business.

A flurry of policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, had failed to arrest the sell-off.

The People's Bank of China (PBOC) also rolled over 250 billion yuan of medium-term loans to banks late on Friday to ensure adequate liquidity in the system.

"The government must rescue the market, not with empty words, but with real silver and gold," said Fu Xuejun, strategist at Huarong Securities Co, before the CSRC and PBOC announcements, adding that a market crash would hurt banks, consumption, companies and even trigger social instability. "It's a disaster. If it's not, what is it?"

The CSI300 index <.CSI300> of the largest listed companies in Shanghai and Shenzhen dropped 5.4 percent to close at 3,885.92, while the Shanghai Composite Index <.SSEC> shed 5.8 percent to 3,686.92 points.

Hong Kong's Hang Seng index <.HSI> fell 0.8 percent to 26,064.11.

For the week, the CSI300 lost 10.4 percent and the SSEC fell 12.1 percent.

The rout in China's highly leveraged stock market has become a major worry for global investors, who fear a meltdown could destabilize the world's second-largest economy at a time when growth is already slowing.

Chinese stocks had more than doubled between November and mid-June, fueled largely by retail investors using borrowed money.

"This is happening against an (economic) growth backdrop that continues to look soft, as illustrated by the flat manufacturing survey this week," noted analysts at Barclays.

"With growth data still soft, China remains a key uncertainty for the global outlook."


The China Daily newspaper said on Friday that the CSRC was probing investors who used stock index futures to "short" the market - or bet on prices falling.

Sources with direct knowledge told Reuters that the China Financial Futures Exchange (CFFEX) had suspended 19 accounts from short-selling for a month.

After market close, CFFEX said it was introducing transaction fees on futures contracts on three indexes and strengthening the market to combat short-selling activities.

Guotai Junan Securities <601211.SS>, one of China's top brokerages, said it would suspend lending securities to clients for short-selling and step up monitoring of abnormal trading behavior by short-sellers.

Much of the selling of Chinese stocks has been driven by "margin calls", when a brokerage that has extended credit to an investor to buy stocks demands more cash or collateral because prices have fallen.

If those margin calls continue, it also could affect other markets as investors need to raise cash.

"Some funds have closed their copper positions to send funds back to China, in order to meet their margin payments on stock indexes," said one metals broker in Hong Kong.

Herald van der Linde, Asia equity strategist at HSBC, said there were signs that some money being pulled out of stocks was going into other assets, with a pick-up in physical property transactions.

"It could go to Hong Kong, it could go to property, it could go to cash," he said. "But if they have to repay debt, it's basically deleveraging, as well."

Beijing has been struggling since the weekend to find a policy formula to restore confidence in its stock markets.

So far, rapid-fire steps including easing monetary policy, encouraging more pension funds to invest in stocks and cutting transaction costs have failed to stem the slump.

The CSRC has relaxed rules on using borrowed money to speculate on stocks, letting brokerages set their own tolerance level on margin calls and allowing the rollover of margin lending contracts.

On Friday, the regulator also said it would step up its monitoring of markets to protect investors against the mis-selling of investment products.

China releases second-quarter gross domestic product data on July 15, and many economists expect growth to dip below 7 percent, which would be the weakest performance since the global financial crisis.

(Additional reporting by Chen Yixin, John Ruwitch, David Lin, Zhang Xiaochong and Kazunori Takada in Shanghai, Michelle Price in Hong Kong and; Writing by Wayne Cole, Alex Richardson and Will Waterman; Editing by Rachel Armstrong)