Chinese ‘circuit-breakers’ prove too problematic for troubled market

China's stock markets normally open from 9.30am until 3pm, with a civilised 90-minute break for lunch, but this week has seen much shorter sessions in Shanghai and Shenzhen.

Less than 30 minutes after the opening bell on Thursday, China’s bourses were closed, as the benchmark CSI 300 Index fell more than 7 per cent and a recently introduced system of “circuit breakers” kicked in. Trading was halted for half that time earlier in the day after a 5 per cent drop triggered an earlier suspension.

Trading for the day was over, and market players got an extended New Year’s break.

Not necessarily a welcome pause on the €6 trillion share market, which is still trying to recoup some of the losses from last year’s catastrophic declines.

So problematic have the circuit-breakers proven, that the Shenzhen and Shanghai stock exchanges announced late on Thursday that they would suspend the mechanism.

"To maintain the smooth operation of the stock market, as approved by the China Securities Regulatory Commission, the Shanghai Stock Exchange has decided to suspend the circuit-breaker mechanism," the Shanghai bourse said in a statement.

The Shanghai Composite tumbled over 7.1 per cent on 2016’s first day of trading on Monday, and Chinese stocks halted trading for a second time on Thursday, after a 7 per cent plunge in the CSI300 index triggered the circuit breaker less than half an hour after the Shanghai and Shenzhen bourses starting trading.

‘Very scary’

“All of us are talking about getting off work early today and we are happy,” Dongxing Securities analyst Hou Yi told Bloomberg.

“This is the shortest trading day.”

On the Sina Weibo social network, one trader who used the handle pinminglianiang said: "All of a sudden it's like I've gone from making a huge amount of money, to everything being gone in a second. The circuit-breaker mechanism is very scary."

Wu Guoping, a financial markets commentator, wrote on Sina Weibo how investors were fooling themselves if they thought it was normal to halt trading twice in just four days.

“I think the best strategy for the moment is to come up with some benefitting policy, such as lowering stamp duty, and let the market return to normal. Secondly, the circuit-breaker mechanism should perfect itself,” said Mr Wu.

“The most panicked time is always when the market ushers into a new stage. Even though things are a bit grim now, we still haven’t lost confidence in the future. We believe it is time to wait for the market to reverse,” said Mr Wu.

More broadly, the Chinese government has some work to do to convince the markets it has management of events in control.

Reputation

"Beijing has its work cut out to salvage its reputation for competent economic management after today's events," said Tom Rafferty, lead analyst for China at the Economist Intelligence Unit.

“The authorities staked a huge amount on propping the markets in mid-2015 - an unwise decision given stocks appeared grossly overvalued- and we are now seeing the situation unravel again,” said Mr Rafferty.

“Investors are being spooked by the functioning of the new circuit breaker mechanism and the downward pressure on the renminbi. The authorities are now faced with a choice of either doubling down on the supportive measures they’ve been implementing for equities over the past six months or relenting to market pressures. Past evidence suggests they will opt for the former approach, but in our view this will at best only delay the correction,” said Mr Rafferty.

Interesting times lie ahead for the Chinese markets, especially as the outlook for the world’s second biggest economy appears grim.