Circuit Breaker! China Halts Stock Market Fall 

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Yifan Xie and Shen Hong report: China’s stock market regulator announced last month that come the New Year it would introduce a circuit breaker–a forced pause to trading–if shares fell too precipitously. On the first trading day of the year, officials had to reach for the newly installed system, twice.

 “The U.S. adopted the circuit breaker system in 1988, and it was only triggered once. The history of China’s circuit breaker is one day, and we’ve triggered it twice.”

An index of the 300 biggest stocks listed in Shanghai and Shenzhen plunged Monday, triggering the circuit breaker and leading first to one 15-minute pause in trading and then a second halt, which closed the markets for the remainder of the day 80 minutes earlier than scheduled.

“Excessive interference with trading will affect market efficiency and become counter-productive.”

— Chief economist Lin Caiyi

The markets opened in negative territory and stayed there as a flurry of bad news arrived: a weaker-than-expected gauge of manufacturing activity and a further slide in the value of the country’s currency. Adding to the bearish mood are worries among investors about the lapse this Friday of a six-month ban on selling shares by major shareholders–those holding 5% stakes or larger in a listed company. The ban was imposed in July last year to stem a meltdown in the stock markets, and its end may lead to more selling.

An investor at a brokerage firm in the Chinese city of Heifi on Wednesday. Individual investors who began selling in mid-June helped unleash a downward spiral of more selling. Photo: Reuters

Markets turned critical 12 minutes into the afternoon session, as the CSI 300 Index fell 5%, prompting the 15-minute suspension. Six minutes after trading resumed, at 1:27 p.m.,the hemorrhaging continued. The CSI 300 index dived further, hitting a 7% limit and bringing the trading day to an end.

[Read the full story here, at China Real Time Report – WSJ]

At the close at 1:34 p.m, the Shanghai Composite Index slumped by 6.9% at 3296.66, and the smaller Shenzhen Composite Index shed 8.2% at 2119.90.

Caught off guard by the plunge, traders speculated that the securities regulator was conducting a test of the new circuit breaker mechanism.

The China Securities Regulatory Commission didn’t respond to calls for comment.

Guotai Junan Securities ‘601211.SH -2.42% chief economist Lin Caiyi described the debut of the new system as a “slap in the face” for the authorities. China’s stock markets already have automatic trading suspensions on individual stocks if they fall too fast, Ms. Lin said in an article published on her blog on Sina.com. “Excessive interference with trading will affect market efficiency and become counter-productive,” she said….(read more)

Source: China Real Time Report – WSJ



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