China circuit-breaker suspended amid stock rout
China’s three main stock exchanges are to suspend the new index circuit-breaker, which went live at the start of this year and has already halted trading twice in Shanghai and Shenzhen.
The Shanghai Stock Exchange, Shenzhen Stock Exchange and China Financial Futures Exchange jointly announced the decision around 10:30pm local time last night, amid mounting criticism of the mechanism.
Deng Ge, a spokesman at the China Securities Regulatory Commission (CSRC), said the new limits had failed to achieve their goal. In fact, they had had a negative rather than positive effect, in that they they caused the sell-off to accelerate rather than mitigating it.
The CSI300 index had fallen 5% by 9:42am local time yesterday and triggered a 15-minute trading halt in Shanghai and Shenzhen. Then in two minutes after trade had resumed, the index had plunged 7.2% to 3,284 points from the previous day's close, triggering a halt on both bourses for the rest of the day.
A similar pattern had occurred on Monday (January 4), resulting in trading stopping for the day.
Meanwhile, major stock markets worldwide, including the S&P500 and the FTSE, tumbled yesterday as a result of worries over the global economy.
Deng said the CSRC would gather public opinion to further improve the circuit-breaker. But he did not say whether the regulator would abolish the limits or when the mechanism would resume.
Despite the quick decision to suspend the trading limits, the CSRC’s failure in implementation has further boosted investor uncertainty over regulatory changes and renminbi policies.
During yesterday’s market rout, market participants urged the authorities to introduce bigger gaps between the 5% and 7% thresholds, noting that the US’s S&P500 circuit breaker, for instance, has thresholds at 7%, 13% and 20%.
Fears over a lack of support for the renminbi had already weakened sentiment on Chinese stocks, as reported. The currency has weakened by 1.51% against the dollar in the first four trading days of the year, sparking concerns of further depreciation.
Moreover, investors had been voicing concerns about the new mechanism. Some argued the resulting volatility could result in a delay to the launch of the Shenzhen Connect trading link.
And Paul Chan, chief investment officer for Asia ex-Japan at Invesco, said on Wednesday that the circuit-breaker could delay inclusion of A-shares in the MSCI global emerging market index series.
Fears that the circuit-breaker – in combination with the existing 10% limit on single-stock-price moves – could hamper liquidity have thus proved well founded.
Jonathan Ha, chief executive of Shanghai-based research firm Red Pulse, said the circuit-breaker seemed to have magnified retail investors’ herd mentality. The 5% limit and 15-minute trading suspension essentially drew attention to the market drop and provided a period in which investors could prepare more sell orders.
Chinese asset managers, worried that the ensuing market rout would result in more fund redemptions, had reportedly voiced their concerns to the Asset Management Association of China. They called for adjustments to the circuit breaker after it was triggered the first time on Monday morning, according to local media.
Learning from that experience, most mainland managers suspended fund subscriptions and redemptions after the market halted yesterday morning. They had faced difficulties with regard to liquidity management because they had to make sure they had enough money to repay investors amid rising fund redemptions.
The CSRC first proposed the circuit-breaker in September last year as a way to stabilise the equity market and protect investors. It was officially announced in early December, despite skepticism about how effective it would be.