The circuit breakers are triggered only by moves on the CSI 300. Trading in China was automatically suspended as a result.
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While circuit breakers initially limit losses, they may encourage investors to sell more. Why?
“Investors are being spooked by the functioning of the new circuit breaker mechanism and the downward pressure on the renminbi”, said Tom Rafferty, Asia economist for The Economist Intelligence Unit in Beijing.
The People’s Bank of China, the country’s central bank, responded Thursday by announcing it would inject $10.6 billion into the financial system.
“It’s always true that the stock market is not the economy, and the economy is not the stock market”, Mr McCarthy said.
The rules shut down China’s main markets twice this week, on Monday and again on Thursday, after shares plunged by 7% on both days.
While investors should focus on China’s economy, not its turbulent equity market, the economy isn’t looking that great either.
The softer-than-expected fixing in onshore trading led to speculation that the Chinese authorities are engineering a weaker yuan to support exports and help the economy.
Today’s trading was the shortest trading time in the history of China’s capital market history, Xinhua news agency reported.
The mechanism was introduced following the crash in mid-2015, which sent global markets in a tizzy.
Beijing reacted forcefully to that slide.
Regulators banned large sales, cut interest rates, cancelled initial public stock offerings and ordered state companies to buy shares. In an effort to prop up the market, regulators organized the purchase of shares using cash supplied by the central bank. They’re created to provide a timeout, giving investors a chance to calm down. The new rule takes effect January 9.
Big shareholders, the management and those who hold more than 5 percent of a company’s shares were asked not to sell more than 1 percent of the company’s shares within any three-month period, a notice said.
Some analysts argue that Beijing would be best served by resisting the temptation to intervene in markets. “They shouldn’t worry as stock prices go up or down”. The market recovered from heavier losses early in the morning.
The pain extended beyond Mainland China on Thursday.
Hong Kong markets fell sharply after trading in China ended abruptly, with the Hang Seng Index ending at the lunch break on Thursday 2.4 per cent lower at 20,479.39. On Wednesday the price of USA crude closed at its lowest since December 2008. Oil is now trading below $34 a barrel.
The health of the Chinese economy has resurfaced as a key concern as we head into 2016, extending a major blow to the markets already rattled by geopolitical tensions stemming from Saudi-Iran tensions and North Korea’s nuclear test. China concerns are shaking confidence of investors and creating volatility across markets.
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China allowed the biggest fall in the yuan in five months, and Shanghai stocks were halted for the second time this week after another big selloff tripped a newly-imposed circuit-breaker.
