The Government has forcefully rejected criticism it illegally manipulated the Hang Seng Index and created a false market by driving up share prices 15 per cent in the last three trading days. Private-investor David Webb - who previously held senior positions at institutions in Hong Kong including Chase Manhattan Bank and Wheelock Capital - has argued the Government may have breached securities regulations by intervening in the market. He drew attention to Section 135 of the Securities Ordinance, which states 'a person shall not intentionally create . . . a false market in respect of any securities on the Unified Exchange'. 'A false market is created in relation to securities when the market price of those securities is raised or depressed or pegged or stabilised by means of . . . any act which has the effect of preventing or inhibiting the free negotiation of market prices for the purchase or sale of the securities.' In a letter in today's Business Post, Mr Webb said: 'The Government should consider whether it is breaching Section 135 by seeking to raise the price of securities in the market as a whole and/or to stabilise them by standing in the market. 'It is one thing to buy stocks because you think they are good value and quite another to do it if your stated and deliberate aim is to raise prices to 'hit them [hedge funds] where it hurts'. 'If the Government does not regard its action as market manipulation, then they surely cannot accuse hedge funds of creating a false market by acting in the opposite direction.' Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong said the Government's action was lawful and in no way constituted manipulation. 'Only those who are spreading rumours or offering misleading information should be regarded as creating a false market,' he said. 'We kept the public informed about the intervention on Friday. How can this be regarded as making false market?' In his letter, Mr Webb explained: 'Ordinary investors who invest in blue chips today bear the risk that they may be acquiring shares at artificially high prices as a result of the intervention. 'Ironically, the action (if it continues for too long) may even impede the future recovery of stock prices as investors will know that the Government has large positions to sell after the intervention stops.' Sources close to the Securities and Futures Commission backed the Government, saying recent action by both the hedge funds and the Government was not illegal. They said repeatedly trading certain shares in a small circle of brokers in an attempt to give a false impression that the stock is very popular would be regarded as making a false market.