Black debut as China markets suspend business after 7 per cent fall triggers circuit breaker on first trading day of 2016
Expiry of ban on share sales by major shareholders this Friday spooks investors; regional markets down on poor China data
A newly launched circuit breaker cut short the year’s first trading day in the Shanghai and Shenzhen A-share markets on Monday, with analysts warning the new policy and expiry of a ban on selling shares by major stock owners of Chinese companies will usher in a volatile week.
Poor Chinese economic data dragged down Asian regional stock markets in what shaped up to be the worst first trading to start a year, with Hong Kong brokers labelling it a “black” debut which they believe could be an omen for a poor performance in equities in 2016.
Under the circuit breaker for Chinese markets launched on Monday, the trading of stocks, index futures and options will be suspended for 15 minutes when the CSI 300 Index, which tracks large-cap stocks in Shanghai and Shenzhen, falls or rises by 5 per cent, with trading halted for the rest of the session when the index moves by 7 per cent.
Trading on the Shanghai and Shenzhen stock markets were suspended for the rest of the day at 1:33 pm after the CSI 300 Index fell 7 per cent to close prematurely on Monday at 3,469.07.
The Shanghai Composite Index closed down 6.86 per cent at 3,296.26. Trading was suspended for 15 minutes at 1:12 pm after the index fell 5 per cent, triggering the first circuit breaker.
The Shenzhen Composite Index tumbled 8.19 per cent, or 189.01 points to close at 2,119.90, while the Nasdaq-style ChiNext dropped 8.21per cent, or 222.78 points to 2,491.27.
Trading on the Shanghai-Hong Kong Stock Connect scheme’s northbound route was also suspended.
Christopher Cheung Wah-fung, a Hong Kong lawmaker representing brokers, said the new rule and the end of a trading ban this Friday were among the reasons for the panic selling on Monday.
“The circuit breaker led investors to rush to sell before the market was suspended,” he said. “Investors are worried about major shareholders selling when the ban expires this Friday, so they opted to sell in advance on Monday or over the next few days. This will definitely be a volatile week.”
Beijing imposed a six-month ban on July 8, 2015 to prevent major shareholders with a stake of over five per cent in mainland A-share companies from selling their investments. Analysts estimates over 1 trillion yuan worth of shares maybe dumped when the sales ban runs out.
The ban was imposed at the height of a market rout that saw the mainland markets lose US$4 trillion in value last year.
The ban helped stabilise the market with the Shanghai Composite Index ending 2015 up 10 per cent and Shenzhen surging 65 per cent on the year.
“The selling ban or circuit breakers may help stabilise the market for the short term but eventually lead to more problems for the market,” Cheung said. “It violates free market principles. We are going to see the Shanghai and Shenzhen markets suspended more frequently this year.”
Wang Hanfeng, chief strategist with China International Capital Corporation (CICC), said the circuit breaker mechanism China adopted “is harsher than those applied on the US, South Korea and India markets”, and would be “more easily triggered”.
“The first stage of the circuit breaker is set too low, and the gap between the first and second stages is too thin. Once the benchmark drops to a level that is close to a trigger in the first stage circuit breaker, investors tend to sell off out of panic, and that will easily trigger the second stage circuit breaker,” Wang said.
CICC said that since the CSI 300 Index was composed in 2005, the Index had moved over 5 per cent in intra-day trading 105 times, and ranged more than 7 per cent 33 times.
After mainland Chinese markets closed early, Hong Kong’s benchmark Hang Seng Index finished the session by dropping 2.68 per cent, or 587.28 points, to close at 21,327.12, having already fallen 2.3 per by the midday close.
The H-share index which tracks mainland Chinese-based companies, lost 3.62 per cent, or 349.58 points, to close at 9,311.18.
China Shenhua posted the biggest losses among the blue chips by falling 6 per cent during trading, while China Life and Ping An were both down 5 per cent each. Tencent fell 2 per cent.
China and regional markets fell after the Caixin Purchasing Managers’ Index (PMI) released on Sunday fell to 48.2 in December, from 48.6 in November, contracting for a 10th month and coming in below a Reuters poll forecast of 49.0.
China’s factories and manufacturing sector are key to the health of the world’s second biggest economy. A PMI figure above 50 signals expansion while anything below indicates a weakening economy
China’s economy grew at its slowest pace in nearly a quarter century in 2014 and stalled further in 2015, as Beijing struggled to transform China’s growth model to a slower but more sustainable economy that would be driven by consumption rather than infrastructure investment.
Japan key Nikkei index was down 3.06 per cent, Taiwan’s stock market dropped 2.7 per cent, South Korea fell 2 per cent and Singapore lost 1.62 per cent.
The yuan continued its losing streak from 2015 into 2016.
The offshore Chinese yuan touched a five-year low at 6.6138 to the dollar, while the onshore yuan was trading at 6.5096 to the greenback.