UPDATE 2-China alleges manipulation by Haitong Securities in widening default inquiry

(Adds Haitong Securities response, paragraph 4)

SHANGHAI, Nov 18 (Reuters) - Chinese investigations into last week’s shock bond default by a state-owned coal miner widened on Wednesday with a regulator threatening to sanction Haitong Securities, one of the country’s biggest brokerages, for alleged manipulation.

China’s interbank bond market regulator said in a statement that Shanghai-based Haitong and its subsidiaries are suspected of providing assistance to Yongcheng Coal & Electricity Holding Group in the illegal issuance of bonds, and of manipulating the market.

The National Association of Financial Market Institutional Investors (NAFMII) also said Haitong was suspected of other violations involving interbank corporate debt instruments and exchange-traded corporate bonds.

In a filing to the Shanghai Stock Exchange, Haitong said it would “actively cooperate” with the investigation and would strictly implement the requirements issued by NAFMII on the issuance of debt financing instruments.

Yongcheng’s default came just weeks after it sold fresh debt and sparked a sell-off in China’s corporate debt market amid renewed questions about the health of state-owned companies, even as foreign investors pile into the country’s debt markets.

NAFMII, a self-regulatory body under the People’s Bank of China, said that it would impose strict sanctions and refer Haitong to “relevant departments for further handling” if the investigation revealed the existence of market manipulation or other “bad behaviour”.

The investigation into Haitong came alongside a tightening of corporate debt issuance rules, including a ban on companies buying their own bonds.

Also on Wednesday, Tsinghua Unigroup, a major government-backed player in China’s technology race, confirmed it had failed to make full payment of principal and interest on bonds due on Nov. 16. (Reporting by Andrew Galbraith, Editing by Louise Heavens, Kim Coghill and Alexander Smith)