SHANGHAI — Stock markets in Shanghai and Shenzhen took a nosedive Monday, losing 7 percent before market operators suspended trade for the remainder of the session.
The Shanghai Composite Index shed 6.9 percent while the Shenzhen index lost 8.2 percent on the first trading day of 2016, reaching fresh lows as investors digested weak manufacturing data out of China and signs of escalating tensions in the Middle East. Other Asian indices also took a hit with Tokyo’s Nikkei 225 falling 3.1 percent and Hong Kong’s Hang Seng sliding 2.7 percent. U.S. shares rose Thursday, the last trading day of 2015, in light volumes over the holiday period.
The suspension in trading is part of a new “circuit breaker” mechanism China announced at the end of last year. The mechanism aims to prevent wild swings in the financial markets. The mechanism follows the Hushen 300 Index of stocks traded in both Shanghai and Shenzhen. When the index rises or falls by 5 percent, the circuit breaker imposes a 15-minute trading suspension. If the Hushen 300 falls over 7 percent, trading is terminated for the day.
“The trading halt obviously has worked against the regulator’s will. The plan was to suppress market volatility but indeed it has magnified volatility and created one of the biggest sell-offs in recent history,” said Hao Hong, Bocom International’s managing director of research.
Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing, said Monday’s market movements indicate that investors are questioning the effectiveness of China’s attempts to reduce its economic dependence on exports and boost domestic consumption. But he stressed that it is important not to read too much into the Chinese markets’ volatility and inherently speculative nature.
“The more diversity you have among trading strategies, the more stability the market has, but this year, everyone had the same strategy,” he said. “Investors [here] interpret the information exactly the same way: if you believe the government is going to support the market, you buy; if you don’t, you sell. The only thing the market is telling us is whether or not the one strategy everyone is using is telling people whether to buy or not.”
Some of Asia’s biggest losers on Monday included Fast Retailing, which shed 4.7 percent in Tokyo. Parkson, which operates department stores across Asia, fell 3.96 percent, one of the bigger declines among retail names in Hong Kong. Chow Tai Fook and Esprit fell broadly in line with the market. The former moved down 2.80 percent while the latter fell 2.34 percent.
Shares in New World Department Store China surged 8.47 percent in early morning trade on market rumors that its parent company New World Development Co. is privatizing its Mainland property arm New World China Land. Shares of New World Development and New World China Land were then halted from trade pending an announcement related to a takeover or merger, the companies said. A New World Development spokeswoman did not immediately respond to inquiries.
Hong Kong billionaire Cheng Yu-tung, a member of the family who controls jeweler Chow Tai Fook, owns both New World companies.