The news emerged on another bad day for shares, which dropped by almost 4 percent in a further blow to hopes that a slew of regulatory measures issued by Beijing over the past three months had brought some stability to prices.

Authorities have been alarmed by the steep equities selloff, which they suspect is linked to alleged market manipulation but has also been triggered by global concerns over slowing growth in the world's second-largest economy.

Among the key players in Beijing's sights is CITIC, where Cheng Boming, general manager and executive director since 2012, and Wang Jinling, vice manager of the information technology center, are both suspected of insider trading and leaking information, the company said.

Since the stock market selloff, authorities have taken an increasingly tough line on alleged manipulation, netting even journalists, social media users and regulators.

In August, four senior executives from CITIC confessed to insider dealing, state media said.

WAITING FOR MORE LOSSES

Concerns about the Chinese economy mean stocks are down 6 percent so far this week, with the drop exacerbated by thin trading volumes as many investors opt to stay on the sidelines.

China's benchmark CSI300 index <.CSI300> of the biggest listed stocks in Shanghai and Shenzhen closed down nearly 4 percent on Tuesday, while the Shanghai Composite Index <.SSEC> dropped 3.55 percent to end at 3,004, just above the psychologically important 3,000 level.

The fall will be of dismay to Chinese policymakers trying to halt the market slide, given that up until this week trade in September had been relatively steady compared with the previous two tumultuous months.

Chinese equity markets have dropped around 40 percent since mid-June despite frantic attempts by the authorities to curb speculation and pressure state-owned institutions to buy up stocks.

However, persistent doubts that China's economic growth this year will meet the government's official forecast of 7 percent are deterring many investors from re-entering the market.

Some retail investors told Reuters they were waiting for the Shanghai Composite index to go down to 2,500 before they started buying again.

Small cap stocks have posted even larger falls, with the CSI300 IT index <.CSI300IT> down 7.4 percent on Tuesday and Shenzhen's growth board ChiNext <.CHINEXTC> 5.3 percent lower.

"With a slim chance of making a profit in this market, money is not coming in," said Zhou Lin, analyst at Huatai Securities.

Data showed heavy investor redemptions last month, with total net assets of Chinese stock funds slumping 44 percent to 724.8 billion yuan ($114 billion).

CHINA RAMPS UP SPENDING

Investors' hesitation comes despite Beijing's attempts to revive slowing economic growth by ramping up government spending. Data on Tuesday showed fiscal expenditure in August was 25.9 percent higher than a year ago.

The spending increase to 1.28 trillion yuan ($201 billion) was the biggest percentage rise in central and local government fiscal expenditure since April, when it leapt 33 percent, figures from the Ministry of Finance showed.

With traditional monetary policy responses such as interest rate cuts having less impact in reviving economic activity than in the past, China is trying to increase fiscal stimulus to shore up short-term growth and fend off growing deflationary pressures.

Reuters reported exclusively on Monday that Chinese authorities had seized 1 trillion yuan ($157 billion) from local governments in unused budget allocations. Sources said the funds would be used to pay for investments.

Data in the past week has pointed to a further cooling in the Chinese economy in August, adding to expectations that GDP growth in July-September would be below 7 percent.

In the latest evidence of the impact of the economic slowdown, Volkswagen and other major carmakers in China have started to rein in production, wages and costs, industry sources said.

Still, Bank of Japan Governor Haruhiko Kuroda said he was confident Beijing's measures would prove effective.

"China's economy has recently slowed, with (weakness seen) mainly in the manufacturing sector. But it is expected to grow stably with support from the authorities' fiscal and monetary measures," he said at a news conference following the BOJ's decision to leave its monetary policy unchanged.

(Additional reporting by BEIJING newsroom, Nathaniel Taplin and Kazunori Takada in SHANGHAI, Andreas Cremer and Norihiko Shirouzu in FRANKFURT; Writing by Rachel Armstrong and Mike Collett-White; Editing by Neil Fullick and Ian Geoghegan)

By Samuel Shen and Pete Sweeney