New | China’s stock markets to introduce circuit breaker from January 1 to stem future routs
Analysts say a market mechanism is better than government intervention
Mainland China’s stock markets will install a circuit breaker from January 1 to prevent a repetition of the market rout which wiped out trillions of dollars from June this year.
Analysts said it was better to have a market-based mechanism rather than arbitrary government intervention, although the move might affect market liquidity, together with a daily cap that allows only 10 per cent upward or downward movement for individual stocks, and a so-called T+1 rule that prevents investors from buying and selling shares on the same day.
A move of 5 per cent in the CSI 300 Index, China’s blue-chip tracker, will trigger a 15-minute halt for stocks, options and index futures, while a swing of 7 per cent would lead to trading being called off for the rest of the day, according to announcements posted by the Shanghai Stock Exchange, Shenzhen Stock Exchange and the China Financial Futures Exchange on Friday afternoon.
Northbound trading via the Shanghai-Hong Kong Stock Connect scheme will be suspended if the circuit breaker takes effect, but southbound would not be affected, the Shanghai Stock Exchange said in a Q&A published on its official microblog.
Adam Xu, a mutual fund manger based in Shanghai, said institutional investors “have been making preparations”, including gathering more long-term funds.
“We should prepare for liquidity difficulties, as it would be challenging to meet the redemption requirements if the whole markets were suspended from trading,” he said.
Clearly the Chinese authorities are nervous about big volatilities, and what they did during this summer after the rout was clearly uncommon
Erwan Sanft, a strategist with Macquarie, said international investors would accept the new arrangement more readily than arbitrary intervention from the authorities.
“Clearly the Chinese authorities are nervous about big volatilities, and what they did during this summer after the rout was clearly uncommon,” he said. “Let’s just say, as long as they let the market decide rather than directly intervening, it is easier.”
This summer’s stock market rout on the mainland sent a gauge of price swings to its highest level since 1997, as leveraged investors trampled each in a rush to cash out after a sudden correction saw the benchmark index drop by 30 per cent from a seven-year high in just a few weeks.
To halt the US$5 trillion plunge in market capitalisation, the government banned share sales by major investors and allowed more than 1,400 companies to suspend trading, and threw in 1.5 trillion yuan (HK$1.82 trillion) to support the indexes.
Adam Reynolds, Asia-Pacific chief executive at Saxo Capital Markets, a Danish online broker, said the circuit breaker “is better than an ad hoc suspension”.
“The circuit breakers do help, make people slow down and think what they are doing,” he said. “I don’t think it will have any major impact on the overall [market] trend.”
The circuit breaker would give investors a “calm period” and help stabilise the market when large volatilities occurred, particularly given China’s stock markets were dominated by retail investors, China Securities Regulatory Commission spokesman Deng Ge told a press briefing on Friday afternoon.
The regulators had referred to international experiences, including those in the United States and Britain, when setting up the circuit breaker mechanism, and would improve and adjust the specific rules in future, he added.
The US installed market-wide circuit breakers after the 1987 crash. A 7 per cent drop in the Standard & Poor’s 500 Index triggers a 15-minute halt for companies listed on the New York Stock Exchange and Nasdaq Stock Market.
