China's government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of "destabilising the market", according to senior officials.
For two months, a "national team" of state-owned investment funds and institutions has collectively spent about $200 billion trying to prop up a market that is still down 37 per cent since its mid-June peak.
China's leaders feel they mishandled the stock market rescue efforts by allowing too much information to become public, according to senior regulatory officials speaking at a meeting late on Thursday — an account of which has been seen by the Financial Times.
Last week's equities collapse, which prompted a rout in global markets, was partly blamed on authorities' apparent decision to refrain from the share purchases they had been making since early July.
After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday.
Traders and officials said the latest intervention was aimed at providing a "positive market environment" in preparation for a big military parade this week to celebrate the 70th anniversary of the "victory of the Chinese people's war of resistance against Japanese aggression".
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Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.
Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government's attempts to shore up the market.
Late last week, the country's securities regulator summoned senior officials from 19 brokerages, equity exchanges, futures exchanges and government-controlled industry associations, and ordered them to step up oversight of the markets.
The regulator said 22 cases of insider trading, market manipulation and "spreading market rumours" had been handed over to the police.
Last Tuesday, following a 22 per cent fall in China's stock market over four trading days — the worst drop for almost 20 years — police detained 11 people suspected of "illegal market activities".
They included eight managers from Citic Securities, one of China's largest investment banks; two officials from the China Securities Regulatory Commission; and a journalist from the respected financial magazine Caijing.
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Four other large Chinese brokerages have said they are being probed by regulators.
In a worrying signal for global investors with a presence in China, some officials have argued strongly for a crackdown on "foreign forces", which they say have intentionally unsettled the market.
"If our own people have collaborated with foreign forces to attack the soft underbelly of the market and bet against the government's stabilisation measures then they should be suspected of harming national financial security and we must take resolute measures to subdue them," said an editorial in the state-controlled Securities Daily newspaper last week.
One Hong Kong-based hedge fund manager, who asked not to be named, said: "Global investors are listening to the language of retribution and watching this witch-hunt going on, and they are trying to understand what this means for them."