Markets calm as Hong Kong stocks circuit breaker launches

Brokers optimistic that there will be no repeat of January’s chaotic scenes, when mainland bourses introduced their control mechanisms

PUBLISHED : Monday, 22 August, 2016, 9:40am
UPDATED : Monday, 22 August, 2016, 11:00pm

Hong Kong stocks rose slightly on Monday, on the first day of trading using a new circuit breaker system that suspends a stock for five minutes if it rises or falls by 10 per cent within five minutes.

However, the system was not called into action because stocks remained largely flat.

The Hang Seng Index added 0.26 per cent, or 60.69 points, to 22,997.91 points at the close on Monday, while the Hang Seng China Enterprises Index covering the shares of companies incorporated in mainland China that are traded in Hong Kong, the H-share index, dropped 0.04 per cent, or 3.52 points, to 9,602.65 points.

Brokers are optimistic about the circuit breaker, saying it will have little chance to reduce liquidity or cause market chaos in the city because the threshold that activates the volatility control mechanism, as it is officially called, is more relaxed compared with worldwide standards.

The exchange will initiate a five-minute suspension in trading if any of the 81 constituent stocks in the Hang Seng Index and H-share index rise 10 per cent in five minutes.

Despite the day’s lack of drama and brokers’ optimism on the mechanism, the launch still brought up bad memories of the past failures of such systems.

Fresh in their minds was when China launched its own circuit breaker on January 4 this year.

That system was designed to be triggered if the CSI300 index – which tracks large cap stocks listed in Shanghai and Shenzhen – fell or rose by 5 per cent, bringing the whole market to a halt for 15 minutes. It would be suspended for the rest of the trading day if the rise or decline reached 7 per cent.

The subsequent meltdown caused the Shanghai Composite Index to fall by 22.7 per cent in January, its worst monthly performance since October 2008 while the Shenzhen Composite Index lost 28 per cent.

Experts say the problem with China’s circuit breaker was that the threshold was set too low and was too easily triggered. The closure of the entire market rather than the stock involved was another problem.

“Hong Kong will not repeat the chaos in China because it suspended the whole market which is different from Hong Kong which will only suspend individual stocks while the threshold is very high in Hong Kong,” said Benny Mau, the chairman of the Hong Kong Securities Association.

Hanna Li Wai-han, a strategist at UOB Kay Hian (Hong Kong) echoed his sentiment, saying that Hong Kong’s mechanism is completely different to the one that operated in China before its use was halted four days after its introduction.

“There is no need to worry about the new mechanism hurting market liquidity or causing a trading suspension in Hong Kong thanks to its high threshold,” Li said.

In Hong Kong, agricultural stocks led the risers, up an average 1.27 per cent followed by basic material stocks, which gained 0.84 per cent. Jewellery and watches led the decliners, falling 1.2 per cent, followed by telecommunications stocks, which lost 0.79 per cent.

Li said with most of the “good news” digested in the past few weeks, a market correction is likely.

In China, stocks dropped on Monday. The Shanghai Composite Index closed 23.3 points, or 0.75 per cent, lower at 3,084.81 points, while the CSI 300 – which tracks the large caps listed in Shanghai and Shenzhen – dropped 0.84 per cent to 3,336.79 points.

The Shenzhen Component Index down 1.3 per cent to 10,731.4 points while the Nasdaq style ChiNext fell 1.69 per cent to 2,167.4 points.