CHINA'S SECURITIES regulator is warning fund managers to avoid comments that might "negatively affect" China's deflating stock market in order to ensure a "harmonious and successful Olympic Games".

In a strongly worded notice to local fund houses, the China Securities and Regulatory Commission (CSRC) stressed that "stability is the top priority of the regulator". It said that some people working in the financial industry had recently made "improper and inaccurate comments" and that staff lacked "considerate thoughts".

Fund companies should "better monitor speeches by employees" and should be "very careful" about public utterances and blog content. Companies that "disobey the rules or have [ negative] social impact" should "take responsibility for the results".

The CSRC also ordered staff not to comment publicly on the trend of stock indices, provide stock tips, comment on investment portfolios or say anything that might damage the "good image of the fund industry".

This is merely the latest effort by the regulator to muzzle industry professionals. In May it ordered fund managers not to sell shares in the wake of the Sichuan earthquake, which killed almost 70,000 people.

Near the end of July, according to the Hong Kong-based South China Morning Post, it ordered four financial newspapers - China Securities Journal, Shanghai Securities News, Securities Times and Securities Daily - to publish positive assessments of stock market matters, a role gleefully taken up by Xinhua, the official state press agency. "If prices fall to a certain level, stocks must be undervalued and a rally will follow," it wrote in a commentary last week.

Investors would dearly love to know where that level might be. The Shanghai exchange has lost more than 50 per cent of its value since peaking last October and has been one of the worst performing stock markets in the world this year. In April, the authorities slashed stamp duty on stock transactions to support equities; the ensuing bounce was short-lived.

Ironically, the government's concerns were very different last year, with stamp duty being increased in an effort to cool what was then a run-away market. The Shanghai Composite index was the best-performing in the world, rising by 97 per cent as the market grew increasingly bubble-like.

Shanghai employment agencies were complaining of labour shortages, with 10 per cent of domestic maids resigning to play the markets. "Chao gu", the locals called it - stir-frying stocks.

A speculative frenzy led to the Chinese market becoming the world's second-largest in terms of turnover. Unlike most major markets, where the bulk of the trading is done by institutions, it's been estimated that individuals make up 60 to 80 per cent of share turnover. Conditions led former Federal Reserve chairman Alan Greenspan to warn that the Chinese market boom was "clearly unsustainable", with a "dramatic correction" likely.

That "correction" is now in full swing. It is not the first crash in recent Chinese history. In the early 1990s, prices increased by more than 1,000 per cent in less than two years before going on to fall by almost 80 per cent.

A long bear market persisted between 2001 and 2005, when prices more than halved. Then, however, trading was not a mass market activity. In contrast, more than 100 million Chinese people now possess brokerage accounts.

A recent investment survey by People's Daily, the state-run newspaper, indicates that the vast majority are now feeling the pain. Ninety-two per cent of respondents said that they were facing a net loss on their investments.

Just 4 per cent could boast of a net gain, with 3 per cent claiming to have broken even.

According to the Epoch Times, a dissident Chinese newspaper based in New York, over five trillion yuan has been lost in the market, "averaging over 50,000 yuan, or $7,000, per investor . . . the equivalent of three years' income for the average Chinese".

In June, angry investors staged a sit-in demonstration outside the Shanghai exchange. With the eyes of the world on China over the next few weeks, the nervous Chinese regulator will be hoping that fund managers do their bit to help prevent any further such developments.