China's markets regulator has suspended a trading account of U.S.-based hedge fund Citadel LLC, the fund said on Monday, in the watchdog's first known move against a big foreign investor as it battles to prop up China's ailing stock markets.
The regulator, which has declared war on "malicious" short selling, has been at the forefront of a government-orchestrated campaign to prevent a meltdown in the two main stock markets, which have tumbled some 30 percent since mid-June.
The Shanghai and Shenzhen markets fell again on Monday, undermined by fresh concerns over the health of the world's second-largest economy.
China's factory activity shrank more than initially estimated in July, contracting by the most in two years as new orders fell and dashing hopes that the world's second-largest economy may be steadying, a private survey showed on Monday.
On Saturday, a local newspaper carried some bearish comments from a central bank official who expected downward pressure would persist in the second half of the year.
The weak economic backdrop has magnified the challenge Beijing faces in trying to restore investor confidence in shares despite a massive, month-long, state-driven buying campaign.
Beijing last week also turned its attention to automated trading strategies, suspecting that some hedge funds were using them to distort the market and profit as a result.
The Citadel statement did not say why the Shenzhen-based trading account had been suspended, but a source familiar with the matter said the China Securities Regulatory Commission (CSRC) was investigating its role in causing market volatility.
The CSRC did not immediately respond to a request for comment.
"Citadel has been actively investing in the region for 15 years, and has always maintained a constructive dialogue with regulators, including during the recent market volatility," the hedge fund manager said in a statement.
It said only one of its accounts had been suspended and that Citadel was otherwise operating normally in China.
"We continue to comply with all local laws and regulations," it added.
Citadel is not the only foreign fund that has been working in China, and some industry insiders think other foreign fund management companies, in particular hedge funds, could be in regulators' crosshairs.
"A lot of the quant shops overseas have been really aggressive in setting up short positions," said one fund management executive at a foreign investment advisory in Shanghai who spoke on condition of anonymity.
"I think these are at risk, I definitely do," he added.
Beijing's unconvincing efforts to hold up markets 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.
They have also raised questions over the ruling Communist Party's 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.
The crackdown on short-sellers and automated trading strategies is also extending into overseas jurisdictions.
The CSRC is pressing foreign and Chinese-owned brokerages in Hong Kong and Singapore to hand over trading records to identify those with net short positions, sources said.
The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen fell 1.4 percent by late morning on Monday, while the Shanghai Composite Index .SSEC lost 2.4 percent.
