In struggle to stem market rout, China hunts manipulators

(Reuters) - China's securities market regulator has opened an investigation into suspected market manipulation, in the latest in Beijing's increasingly desperate attempts to head off a potential stock market crash that could damage an already slowing economy.

After a slump of more than 20 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".

The China Daily newspaper said on Friday the CSRC was probing investors who used stock index futures to short the market.

On Thursday, Shanghai's benchmark composite index <.SSEC> slumped below 4,000 points for the first time since April - a key support level that analysts had expected Beijing to defend. It had more than doubled over the last year, fueled in large part by speculators using borrowed money to bet on shares.

"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."

Weakness in Chinese demand was blamed for a steep 8 percent slide in prices for iron ore on Thursday. A sixth straight session of declines dragged the price for the steel-making mineral to a 10-week trough at $55.80 a ton <.IO62-CNI=SI>.

The retreat comes amid booming supply of the ore with Australian shipments from Port Hedland hitting record highs in June. The long decline in iron ore prices has been a major blow to profits and incomes in Australia as the mineral is its single biggest export earner.

Beijing has been struggling since the weekend to find a policy formula that would restore confidence to the 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 rout.

The CSRC has also relaxed rules on using borrowed money to speculate on stock markets, letting brokerages set their own tolerance level on margin calls and allowing the roll-over of margin lending contracts.

China is due to release 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 and John Ruwitch in China; Editing by Kim Coghill)

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