By Casey Hall
with contributions from Amanda Kaiser
 on January 6, 2016

SHANGHAI – Chinese markets suspended its markets for the day for the second time this week as shares plummeted in morning trading.

The “circuit breaker” mechanism, which was introduced on Monday, the year’s first day of trading, automatically triggers a market shutdown when shares on the blue-chip CSI 300 list of companies in Shanghai and Shenzhen tumble over 7 percent.

On Thursday morning, it took a mere 13 minutes for shares to temporarily halt trading for 15-minutes, the first step in the circuit breaker mechanism, which is enabled when shares fall 5 percent. Trading resumed for little over a minute before continued falls triggered suspension for the day at 9:59 a.m., a mere 29 minutes into the trading day, after a total of only 13 minutes of trading.

The CSI 300 plunged 7.2 percent, ending the day at 3284.74. For its part, the Shanghai Composite Index managed a 7.3 percent drop, down 245.96 points to 3115.89, before the day’s premature end.

The steep falls came on the heels of an announcement from China’s central bank that it had weakened the yuan’s daily reference rate by the most since August.

The People’s Bank of China (PBOC) attempted to clarify its position later in the day, emphasizing its desire to keep the yuan stable and attributing the currency’s moves to speculators.

“Some speculative forces are trying to reap gains from playing [the] renminbi,” the PBOC said.

Today’s rout also prompted China’s Securities Regulatory Commission (CSRC) to impose a limit of 1 percent of a company’s shares that major corporate shareholders can sell within a three-month period.

An existing six-month CSRC ban on secondary market stock sales among major institutional investors was due to expire on Friday.

On Tuesday, after the circuit breaker was tripped on its first day of use, Chinese regulators said they would continue to work on improving the mechanism, though they were satisfied with the role it had played in averting even more dramatic sell-offs.

“China has no experience of using the circuit breaker mechanism, and it takes time for the markets to adapt to new rules,” the CSRC said. “The circuit breaker did play its role in calming investors down, based on what happened on Monday. There is no one standard way of using the circuit breaker, and it cannot be perfect in one go, we will consider improving the mechanism based on specific situations.”

Questions are now being asked about whether the circuit breakers themselves are partly to blame for these steep and swift drops, as China’s flighty retail investors try to dump as much stock as possible before the mechanism is enacted.

“Many of China’s newly introduced ‘circuit breakers’ look to have only compounded panic selling as investors rushed to get their sell order out the door before they got caught in a limit-down,” Angus Nicholson, market analyst at IG in Melbourne, wrote in a note.

A similar circuit breaker mechanism exists in other countries, including the U.S., but with much larger gaps between suspensions and halts. The Standard & Poors 500 Index, for example, temporarily halts trading after a 7 percent fall, then a 13 percent drop marks a second suspension, but the trading day is only halted if the market falls 20 percent.

China’s markets have always been volatile, with 5 percent jumps and drops in any given day a relatively common occurrence, so the need for wider gaps in the circuit breaker mechanism seems even more important here.

Despite this panicked selling coinciding with a number of less-than-impressive economic announcements out of Beijing, some experts are warning not to read too much into the relativity of a slowing economy and sharp declines in the stock market.

Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing and a Wall Street veteran, told WWD the only thing people need to understand about this week’s market falls is that they are a reflection of investors’ confidence, or lack thereof, in the government’s willingness to once again bail out the market, after a costly and unprecedented effort last summer.

In essence, when investors believe the central government will cushion a major rout with a bail out, they buy – as seen in the huge rise in the value of Chinese markets between mid-2014 and 2015.

“I’ve been telling my clients since February or March that the stock market was going to be extremely volatile because, not only is it normally volatile, because it’s a speculative market, but primarily because the more diversity you have among trading strategies, the more stability the market has, but this year, everyone has the same strategy,” Pettis said.

All eyes are now on Beijing to see what move they might make next in their continuing efforts to encourage some kind of stability in their financial markets.

 

 

 

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