China watchdog probes automated trading as stocks slip again

By Samuel Shen and Pete Sweeney

SHANGHAI (Reuters) - China's securities watchdog is investigating the impact of automated trading on share markets, as authorities step up a crackdown on what they regard as heavy speculative selling that could destabilise the world's second-largest economy.

China's main share markets, both among the world's five biggest exchanges, have lost around 30 percent of their value since mid-June, but authorities have been flailing in efforts over the past three weeks to prevent a further sell-off.

Fearing the turmoil could spill over into the wider economy, which had already been cooling, the ruling Communist Party has enlisted the central bank, the state margin-lender, commercial banks, brokers, fund managers, insurers and pension funds to buy up shares, or help fund their purchase, to keep the Shanghai and Shenzhen markets afloat.

The China Securities Regulatory Commission (CSRC), the markets regulator, has stepped up scrutiny of share traders and their clients, launching investigations of "share dumping" and declaring war on "malicious short-sellers".

It is also asking financial institutions in Singapore and Hong Kong for stock trading records, sources with direct knowledge told Reuters, widening its pursuit of investors shorting Chinese stocks as Beijing struggles to stabilise queasy exchanges.

The CSRC announced automated trading as the latest focus of its investigations on Friday, as share markets lost more ground.

China's benchmark CSI300 index <.CSI300>, which comprises the largest listed firms in Shanghai and Shenzhen, dipped in morning trade, though it is still up around 7 percent over what has been a roller-coaster 2015.

Wang Feng, chief executive of Alpha Squared Capital, a Chinese hedge fund, said the regulator was targeting automated trading programmes that involved the frequent cancelling of bids, though he added that his firm did not employ this tactic.

"The CSRC is only targeting those who use programme trading to frequently submit and then cancel bids, thus disturbing the market and manipulating prices," he said. "Such a practice is closely watched by regulators in the U.S. as well."

The CSRC identified 24 stock trading accounts where it said it had detected abnormal bids or bid cancellations. Later, the Shanghai and Shenzhen exchanges said these accounts would be suspended until October 30.

SPECULATION OF MORE STIMULUS

Amid the market turmoil, some foreign investors see an opportunity to buy, believing confidence will eventually return and private Chinese investors will come back to the market.

"At some point, the magnitude of the Chinese market has to reflect its industrial might," said Yu-Min Wang, chief investment officer at Nikko Asset Management which oversees around $170 billion.

However, a Reuters poll showed that Chinese fund managers had cut the proportion of their portfolios to be invested in stocks over the next three months to a 6-1/2-year low.

Beijing's unprecedented but so far unconvincing efforts to hold up the market have led foreign investors to air doubts about the leadership's ability to ensure financial stability at a time of slowing economic growth, high corporate debt and the threat of deflation.

On Thursday, investors took fright at a newspaper report that banks were trying to get to grips with their financial exposure to the market slump, through wealth management products and loans collateralised with shares.

Reuters could not verify the report.

Beijing's intervention in the share market has also raised questions over its commitment to free-market reforms, seen as essential for China to pull off its planned transition from an export-led economy to one based on consumption and services.

There are also some worries about the impact of falling share prices on the real economy, though household ownership of shares is very low and - apart from a further drop in luxury car prices - there has been no concrete evidence yet of a major impact on consumption.

However, the market rout has rekindled expectations that the People's Bank of China will ease monetary policy further in the next few weeks. It has already cut interest rates four times since November and repeatedly loosened restrictions on bank lending.

Japanese brokerage Nomura said in a note this week that it expected another 50 basis point cut to the reserve requirement ratio for banks, which would free up more money for lending, and another interest rate cut of 25 basis points before year-end.

China's Politburo, a decision-making body of the Communist Party, this week promised to step up targeted adjustments of economic policy to foster stable growth.

(Additional reporting by Lu Jianxin and Nathaniel Taplin; Writing by Mark Bendeich; Editing by Kim Coghill and Neil Fullick)