TAIPEI, Taiwan (TheStreet) -- China detained a superstar hedge fund manager this month on suspicion of insider trading, a case that could help rip the bars off a hobbled stock market.

The case against Shanghai-based manager Xu Xiang is Beijing's latest criminal investigation and probably not the last. That's because China sees law enforcement as another tool to ease stock market volatility, which has kept foreign investors on guard since a mid-year crash.

"Beijing remains determined to support equity prices, and officials will stop at almost nothing to make sure the market does not fall significantly from current levels," said Gordon Chang, an author on Chinese economics and politics.

A stepped-up legal crackdown would at least take stock-price manipulators out of the system and clean it up for foreign investors who worry about price manipulation among other systemic problems such as transparency.

Foreign funds have put little new capital into Chinese shares since June, because they fear another drop, analysts say, and official figures show asset managers have removed money since August, leaving $78.97 billion in foreign currency in the market as of Oct. 29.

Police are investigating Xu, head of five-year-old Shanghai-based Zexi Investment, this month on suspicion of stock manipulation insider trading, state-run media say. 

Xu would also get onto the boards of listed companies to push for dividends, earning comparisons to Carl Icahn, a 77-year-old Wall Street veteran. Xu's company, which has total managed assets of $1.6 billion, did not answer calls this week.

Chinese authorities are also investigating four executives from the local brokerage CITIC Securities  (CIIHF) for possible insider trading. A China Securities Regulatory Commission official is being separately probed over suspected insider trading and taking bribes.

Other Chinese investment pros, including more than 100 heavyweight stock brokerages, may be freaked out by the busts and resist any temptation to break laws, further improving regulation and curbing volatility. China's Communist government can move fast against criminal suspects when it seeks to prove a point.

"Hopefully people will be more professional," said Michael McGaughy, head of research at Yuan Asset Management in Hong Kong. "There are probably a lot of laws in China that already prohibit (insider trading), but they're not being enforced. You kind of hope Xu Xiang is a watershed and they'll keep prosecuting people."

A string of busts would show the world that Chinese officials are increasingly serious about controlling share prices, in turn raising confidence.

Chinese authorities who hope to capitalize listed domestic startups as a new economic engine want more investment from the likes of the U.S.-listed Market Vectors ChinaAMC A-Share ETF (PEK - Get Report) , Invesco's China Focus Equity Fund (AACFX - Get Report) and the Goldman Sachs China Equity Fund Class "A" Shares (GNIAX) .

Chinese officials have tried to rescue share prices as well by curbing selloffs, encouraging state entities to buy shares moving toward more liberalization of the controlled yuan currency.

Prices have come up 22% from a low in August, and analysts point to government intervention as a top reason. The benchmark Shanghai Composite Index had lost about 40% over the previous three months after a roughly 150% increase a year before that.

"When the market was as hot as it was, it was ripe for individuals or groups to come together to take advantage of it," said Song Seng Wun, an economist with the private banking unit of CIMB in Singapore. "All the arrests or the trials will be watched. Over time we can tell whether confidence comes back."

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.