China cracks down on manipulation at feverish over-the-counter stock market

* Some stocks traded as high as $16K per share before investigation

* Over-the-counter equity market grown rapidly on back of policy support

* Premier Li signaled support for OTC boards

SHANGHAI, April 1 (Reuters) - China’s leading over-the-counter(OTC) equity exchange is cracking down on illegal trading, with concerns growing that the market, which is aimed at small high-growth firms and private equity investors, is overheating.

The operator of Beijing’s “New Third Board” said late on Tuesday it was investigating a series of “ultra-high” price quotations during the week of March 23-27. The price of one share of Anhui Hauheng Biotechnology Co Ltd, for example, at one point cost 99999.99 yuan ($16,145) before falling back to 1,058 yuan per share.

Such high quotes can be an indication that a stock is being manipulated, with very large prices being used to entice people into the market.

Anhui Hauheng could not be immediately reached for comment.

The National Equities Exchange and Quotations (NEEQ), which operates the exchange, said it is investigating some trading accounts, saying they had “seriously disrupted market order”.

“We have zero tolerance, and will take out our sword,” it said in a statement.

The New Third Board used to be a backwater, but government policies aimed at developing alternative funding sources for small companies, which often lack access to bank loans, have turned it into China’s hottest stock market over the past year, with more than 2,000 companies now listed.

China’s Premier Li Keqiang visited the New Third Board in December, and said he hopes it can become a leading example for the development of OTC markets nationwide.

Last year it became the only OTC platform where brokerages can make markets in selected stocks, helping to boost liquidity. Regulators have also said they will formalise a route for companies on the board to upgrade to the main stock exchanges - a shortcut round China’s long and slow-moving IPO queue.

Investors have jumped on the policy signals, and pushed the New Third Board’s index up more than 70 percent in the first quarter, dwarfing the main stock market’s stellar gains . Turnover totaled more than 16 billion yuan in the first quarter alone, eclipsing the 13 billion yuan booked in all of 2014.

While policymakers will be pleased at the board’s success, the concern is that market manipulation and weak oversight could harm its credibility, undermining the aim of giving small companies access to finance without them having to tap the shadow banking system or join the congested IPO queue.

“The crackdown won’t have a big impact on investor enthusiasm. Instead, it sends a strong signal that regulators want to protect investors so that the market can develop in a healthy manner,” said Jim Wong, partner of Hiway Law Offices who focuses on OTC board-related business.

Analysts expect more than 3,000 companies will be listed on the board by year-end, more than the number listed on the Shanghai and Shenzhen stock exchanges combined.

“This market has just started to attract attention, so the investment opportunity is huge,” said Zhou Liang, a fund manager who’s launching his third New Third Board fund.

Zhou predicted regulators would lower individuals’ investment threshold to 1 million yuan in the second half of this year, from 5 million yuan now.

But retail investors can also access the board through various investment vehicles as well as directly. About 80 fund products have launched over the past year to guide investment into the market, including 20 in the last month alone, according to NEEQ. ($1 = 6.1940 Chinese yuan renminbi) (Reporting by Samuel Shen and Pete Sweeney; Editing by Nachum Kaplan and Rachel Armstrong)