China's index curb adds to investor worries
Foreign fund managers, already alarmed by restrictions imposed on China’s stock market by the government, can add a new reason not to put their money into the country: regulators are introducing an index circuit breaker.
Stocks in China are already subject to automatic trading freezes if they move by 10% in a single trading session. Those limits didn’t prevent the CSI 300 Index from suffering a 37% fall in value this year since reaching its 8 June peak of 5,353 points.
Now authorities intend to add a new control by putting similar automatic stop-loss controls on indices.
On 7 February, the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the China Financial Futures Exchange jointly announced a plan to trigger a circuit breaker whenever the CSI300 rises or falls by 5%. This will entail the suspension of trading for 30 minutes.
Daily trading will close on all three bourses if the mechanism is triggered after 2.30pm or if the index changes by 7% within a day’s trading.
The new circular breaker mechanism will apply to all listed stocks, convertible bonds, listed funds and stock options on both SSE and SZSE, and the index futures contacts on CFFEX, except bond futures. According to such rules, the system would have been triggered for 24 times in the past 12 months, mostly in the past three months, according to Bloomberg data.
Although the exchanges justified the proposal on the grounds that the markets are driven by retail investors, fund managers in Hong Kong told AsianInvestor that hedge funds and quantitative strategies will be affected.
Long-only and fundamentally driven portfolios should not be directly impacted by the proposed mechanism, fund managers said. But the new rules would have to be implemented by anyone trading via the Shanghai-Hong Kong Stock Connect channel.
A fund manager said adding triggers to curb volatility that disrupt trading are unwelcome and will deter overseas clients, most of whom have not yet developed China-specific investment mandates.
“Many of our clients dislike recent interventions,” he said. “They will have more worries about China.”
Not everyone agrees, however. Fund managers in China are voicing support for the measure. Yang Delong, chief strategy analyst at Shenzhen-based China Southern Asset Management, told local media the scheme could reduce the likelihood of market panics.
Fund managers in Hong Kong worry an index circuit breaker could hamper liquidity. Many stock markets around the world deploy stop-loss limits on specific stocks, but adding a second layer involving indices is more likely to lead to suspensions of trading. In times of crisis, when liquidity is already scarce, freezing the entire market will only build up greater selling pressures, according to an analysis by Shanghai-based independent financial advisor Howbuy.com.
The three bourses are seeking public opinions on the index circuit breaker proposal by 21 September. Fund managers told AsianInvestor they doubt anyone will raise serious objections for fear of alienating their regulators. Several equity traders and portfolio managers declined to comment on this topic given their sensitivity toward Chinese authorities.
Ultimately foreign investors don’t believe this measure, taken on top of many other interventions this summer, would defeat market impulses. “We’d prefer the Chinese government focus on economic growth, reforms and corporate governance,” a fund manager said.