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China said to probe Shanghai FTZ firms on manipulation claims

A man walks past the gate to China (Shanghai) Pilot Free Trade Zone's Pudong free trade zone in Shanghai, China.

[HONG KONG] China is investigating companies in Shanghai's free-trade zone that allegedly exploited looser policy controls to manipulate the stock market, according to people familiar with the matter.

The Shanghai zone companies may have fabricated cross- border trade to transfer capital into and out of China, said the people, who asked not to be identified because the probe hasn't been made public. The investigation is part of a broader probe into accusations that some trading firms may have manipulated the stock and futures markets.

The alleged malfeasance exposes some of the risks China faces as it opens up its capital account and seeks to make good on pledges in 2013 to give the market a more decisive role in the economy. A stock market plunge in the last month and allegations that shares may have been manipulated prompted swift government intervention and may slow those reforms.

"The regulation in the Shanghai free-trade zone will be stricter in the future as a result of the probe," said Le Xia, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. "The Chinese government will be more cautious. The pace of capital account opening will probably slow in the near-term."

Two phone calls to an office in charge of media relations at the Shanghai free-trade zone's management committee went unanswered.

Authorities earlier this month began investigating "malicious short-selling" of stocks and equity indexes, The Xinhua News Agency reported on July 12. The team, led by Vice Minister of Public Security Meng Qingfeng, found signs some trading companies may have manipulated futures, and went to Shanghai on June 10, Xinhua said.

The Shanghai Composite has now rebounded 15 per cent since July 8, following a monthlong rout that wiped out almost US$4 trillion.

China has expanded the yuan clearing-bank network to 17 cities including London, Seoul, Sydney and Johannesburg. This year, it opened up the short-term loan market to foreign banks and removed some restrictions on overseas sovereign investors in its inter-bank bond market.