China regulators suspend circuit breaker mechanism, citing need for ‘stability of markets’

Mainland regulators say mechanism has failed to achieve its aim of stability after trading day lasts just 13 minutes before business grinds to a halt

PUBLISHED : Thursday, 07 January, 2016, 10:20pm
UPDATED : Friday, 08 January, 2016, 10:32am

Mainland regulators said late Thursday that the circuit breaker policy will be suspended with immediate effect, acknowledging that it had failed in its intended goal of calming stock markets during periods of heightened selling pressure.

China Securities Regulatory Commission spokesman Deng Ke said in a statement that the policy would be unwound ahead of the open of trading Friday and set aside for further study.

“The negative impact now has exceeded the positive side,” Deng said. “In order to protect the stability of the stock market, the CSRC has decided to suspend the mechanism.”

He said the CSRC would study the circuit breaker in light of market activity and seek to learn from the experience.

Prior to the CSRC’s announcement, market watchers had criticised the intended calming mechanism as failing in its mission owing to design defects.

Among unintended consequences, asset managers were cashing out of Chinese equities amid fears that the circuit breaker could be a long term negative for market liquidity.

“It is most important to make sure the capital is safe. We are placed in an unprecedented situation,” said a trader who overlooks a 10 billion yuan equity fund.

Two private equity fund managers based in Shanghai had said that they planned to exit all equity positions on Friday morning, if the China Securities Regulatory Commission hadn’t come up a major revision to the circuit breaker by the market open.

Watch: US stocks tumble into 2016 after China plunge

Mainland officials requested brokerages submit activity reports before Friday morning as part of their assessment of the market stability mechanism.

The circuit breaker was approved by CSRC chairman Xiao Gang late last year, according to a source close to the CSRC. The circuit breaker however did not go through a verification process by the State Council, the source said.

Hong Hao, chief strategist with Bocom International said the Chinese regulator tends to avoid back tracking on new policy initiatives.

“Based on experience, the CSRC rarely changes a rule in such a short time after they introduced it,” he said.

The major circuit breaker was tripped at 9:58 am on Thursday morning, after the benchmark Index CSI300 plunged 7.2 per cent, shuttering trade for the day. Initially trading was suspended for 15 minutes at 9:42am, when a first-stage circuit breaker activated as the CSI300 tumbled 5 per cent.

Trading had resumed for only one minute before the second-stage circuit breaker was tripped.

“Everyone was fleeing when the index dropped close to the level that triggers the circuit breaker,” said Adam Xu, a mutual fund manager based in Shanghai.

“Regulators have decided 5 per cent and 7 per cent as the two stages for the circuit breaker... But the levels are too low and too easy to be triggered,” he said.

Untied States regulators introduced market-wide circuit breakers in 1987 to prevent losses from snowballing during a period of dramatic stock price declines in October of that year. Under the current system, a 7 per cent decline in the major US indexes prior to 3:25 pm will trigger a 15-minute suspension of trade.

If the plunge reaches 20 per cent at any point during the trading session, the entire stock market will shut for the rest of the day.

Still, market shutdowns are a rare event in the major US markets. Only once in its modern history have New York markets shut for an extended period -- during the September 11 terror attacks.

“The circuit breaker is exaggerating the market fear, but clearly not the cause of the market fear.

The yuan is the key trigger of the market correction. Markets will get more and more nervous with accelerated yuan depreciation,” said Mo Ji, chief economist, Asia ex-Japan of Amundi.