China’s three main bourses will implement further stock-trading limits – albeit slightly watered-down from measures proposed in September – despite investor doubts that they will help stabilise the equity market in a crisis.
The circuit-breaker mechanism will go live on January 1 on the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE) and China Financial Futures Exchange (CFFEX), the trio said in a joint announcement on Friday evening.
The exchanges will suspend trading for 15 minutes whenever the main stock benchmark, the CSI300, index rises or falls by 5%. This will apply to all listed stocks (both A- and B-shares), listed funds (including gold, money-market and bond exchange-traded funds) and convertible bonds on both the SSE and SZSE, and to index futures contracts on CFFEX. The day’s trading will cease on all three bourses if the mechanism is triggered after 2.30pm or if the index moves by 7% at any time of the trading day.
Hedge funds will be most affected by the new measures, as they are key, short-term-trading-orientated participants in the Shanghai-Hong Kong Stock Connect scheme. However, long-only and fundamentally driven portfolios would not be significantly impacted, Hong Kong fund managers told AsianInvestor in September.
The moves come despite widespread criticism of the mainland government’s intervention to stem the stock-market sell-off during the summer.
The Chinese authorities have accepted that its previous proposal of a 30-minute suspension would have been too long and could hamper market liquidity, after receiving 4,861 responses during its consultation in September.
However, the exchanges said the new trigger was necessary because 7% would represent a volatile market swing, indicating the market needed cooling.
Mainland single stocks are already automatically suspended if they move by 10%, and investors have voiced concerns about the overlapping rules and questioned whether the new mechanism is necessary.
After all, the 10% single-stock limit did not seem to help much when the CSI300 index fell 43% between its June 8 peak of 5,353 points and its lowest point this year on August 26. It was down 31% as of yesterday since June 8.
The exchanges counter that each mechanism functions differently and that the single-stock 10% cap was insufficient for stabilising the market during the rout this year.
They are also reluctant to change the single-stock limit, arguing that it is a fundamental part of the mainland stock market, and that any relaxation would result in changes in risk management of settlement systems, margin financing business and investors’ trading habits.
The bourses also said that since the mainland stock market was dominated by retail investors, the new mechanism was important for preventing prevent a market overreaction when share prices rise quickly.