China suspends circuit-breaker amid market madness

China suspends its newly minted circuit-breaker mechanism designed to help stabilise the equity market after it instead sparked stock sell-offs.

China’s securities regulator has suspended its newly implemented circuit-breaker mechanism designed to tame market volatility after it exacerbated stock sell-offs and shut down equity trading early twice in one week.

The China Securities Regulatory Commission announced late on Thursday night that the circuit-breaker system would be halted from Friday, only four days after introduction, without saying how long the suspension will last.

“It didn’t work out as expected… Currently the negative effect is bigger than the positive one. Therefore, we have decided to suspend it in order to maintain market stability,” the CSRC said in a statement posted on its Weibo account.

The regulator implemented the mechanism on Monday, hoping to offer a “cooling period” when there are sharp fluctuations in the market and therefore stamp out the wild swings. 

A move of 5% in either direction on the CSI 300 Index, China’s blue-chip tracker, triggered a 15-minute trading halt for stocks, convertible bonds, stock options and futures contracts. A swing of 7% froze trading for the rest of the day.

Previously, individual Chinese stocks were only allowed to rise or sink by a maximum 10% per day.

Circuit-breaker controversy

However, the new mechanism appears to have amplified the panic among investors and prompted new waves of selling in response to sluggish economic data and renminbi weakening, according to some market players and equity analysts. 

Hong Hao, chief strategist at Bocom International in Hong Kong, said circuit-breakers could easily pose threats to market liquidity and investor sentiment.

“Clearly the tight stops of 5% and 7% of China’s circuit breaker have a magnet effect as prices gravitate towards the breaker [striking points] and prompt a stampede that drains market liquidity,” he said.

The circuit-breaker system halted trading early on Thursday for the second time in a week, following its first use on Monday. The close of a 14-minute trading session in Shanghai and Shenzhen on Thursday morning also marked the shortest in the country’s history.

“There are huge risks to introduce it in China now as irrational, retail investors are not really for it. When they see the market fall by 3%, they will only want to sell rather than buy. Then it could soon trigger the trading halt. Then there’s no liquidity,” one Hong Kong-based senior investment banker at a Wall Street bank told FinanceAsia.

Fresh stock-sale restrictions

Earlier on Thursday, the CSRC also introduced fresh restrictions on stock sales. It announced new rules to prohibit large shareholders and company directors or managers with stakes of more than 5% from selling more than 1% of their outstanding shares every three months.

In a separate statement, the CSRC said the new rules would help to “defuse panic sentiment” among investors and would not lead to a new peak of stock selling. “There’s no basis to say they will lead to sharp falls in the market.”

The new rules, which will come into effect on January 9, require stock sales to be conducted through a centralised auction system and major shareholders to disclose equity-disposal plans 15 days in advance.

“The 15-day heads-up could more or less dilute the impact on the market – as retail investors know which company’s major holders plan to sell shares. Retail investors can exit their positions first,” said one Beijing-based fund manager at Citic Securities.

The new measures, which will apply to significant stakes held when a company listed, replace an existing ban set to expire on Friday. 

Beijing in early July imposed a six-month curb on stock selling by major shareholders as part of a raft of controversial measures introduced in the summer to prop up sagging markets.

China’s stock market, dominated by retail investors, has been one of the most volatile in the world over the last 18 months, with the Shanghai Composite index advancing by as much as 150% in a year-long rally running through mid-June, before plunging 43% by late August. It recovered somewhat in the subsequent months, and plunged again into 2016.  

Hong at Bocom International told FinanceAsia earlier on Thursday that the new restrictions alone would be “useless to stem the market plunge as the top priority now is either to abolish the circuit breaker mechanism or improve it.”

Some of China's retail investors have tried to use humour on social media platforms like Wechat and Weibo to deal with the new circumstances.

One wag said the new circuit breakers were like having a girlfriend with a bad temper: "If she’s angry with you and you fail to cheer her up in 15 minutes, she won’t be talking to you for the rest of the day.”

¬ Haymarket Media Limited. All rights reserved.

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