By Michelle Price and Clare Jim

HONG KONG (Reuters) - A bitter shareholder row at China's largest property developer is a first big test for the country's new securities chief, appointed earlier this year to heal the wounds of last year's stock market meltdown and restore investor confidence.

A high-profile takeover tussle at China Vanke Co Ltd <000002.SZ> has shone a light on risky shadow lending products known as Asset Management Plans (AMPs) used by Vanke's top investor Baoneng Group to finance its stakebuilding - fuelling investor concern over the more widespread use of such products.

Investors and analysts want to see how China Securities Regulatory Commission (CSRC) Chairman Liu Shiyu will handle the issue, warning that a heavy-handed response similar to last summer's market interventions could spark another stock sell-off.

Liu, who took over in February to restore the regulatory agency's reputation after it came under fire for mishandling last year's market crash, is a former central bank deputy governor. Some financial industry insiders say he is very wary of any new sources of financial market risk.

"The Vanke-Baoneng fight is a big test for the new CSRC chairman in terms of how he will address this issue within the parameters of the law and regulations without over-reacting," said Ivan Shi, head of research at consultancy Z-Ben Advisors.

Fearing a hostile takeover by Baoneng, a financial conglomerate which has built up a 25.4 percent stake, Vanke announced a $6.9 billion 'white knight' share-asset swap with the operator of the Shanghai metro in a bid to dilute Baoneng's holding. Baoneng tried to oust Vanke's board.

In the latest salvo, Vanke has written to the CSRC asking the regulator to investigate how Baoneng funded its stakebuilding, alleging its top shareholder violated Chinese financial regulations by using AMPs.

JP Morgan has recently estimated that assets under management of AMPs - which use share as collateral and are often highly leveraged - reached 32 trillion yuan ($4.8 trillion) in the first quarter of this year.

Vanke says Baoneng breached a number of regulations, including disclosure rules and restrictions on the structure and use of AMP investment vehicles.

Baoneng has not commented publicly on Vanke's letter to the CSRC and did not respond to requests for comment by Reuters.

The CSRC wrote to both companies last week saying they had violated disclosure rules, according to Vanke exchange filings.

On Friday, the CSRC told reporters it had launched an investigation, and criticized both Vanke and Baoneng for acting against the interests of the market and small investors. It said it would punish any violations.

The CSRC did not respond to Reuters requests for comment.


Chinese regulators, fearing an increase in systemic financial risk, have begun tightening the rules covering AMPs. In May, the CSRC proposed imposing capital requirements and leverage restrictions on AMPs issued by asset management companies, local media reported.

Liu needs to address the increase in the use of leverage in the market, but if he cracks down too hard on such products he risks more stock market volatility as investors liquidate their holdings, investors and analysts say.

That could compound a 14 percent fall in Chinese stocks <.CSI300> since January.

"The CSRC is unlikely to rule on general AMPs" as a result of the Baoneng case, said Bai Li Tuan, counsel at DeBund Law Offices in Shanghai. "If the CSRC tightens up further on AMPs, it may trigger a next wave of (stock market) rout."


The Vanke battle has also further exposed a lack of regulatory coordination between the CSRC and its insurance and banking counterparts, as banks have used products regulated by the CSRC to skirt around China Banking Regulatory Commission (CBRC) rules.

Insurers, regulated separately by the China Insurance Regulatory Commission (CIRC), have also used these products. The CBRC and CIRC did not respond to requests for comment.

Z-Ben's Shi said the questions raised over Baoneng's financing would give further impetus to plans to merge the CSRC, CBRC and CIRC into a single authority covering banking, insurance, securities and mutual funds. Reuters first reported on these plans in November.

China is considering moving to a regulatory system similar to that in the UK, where the central bank has ultimate oversight of all financial system risks.

"Perhaps one of the systematic implications of this will be that the super-regulator, if and when it comes, may be better able to address the regulation of such privately-owned financial conglomerates," said Shi.

(Reporting by Michelle Price and Clare Jim; Editing by Lisa Jucca and Ian Geoghegan)