A new circuit breaker created to stem volatility in China’s stock markets by halting trade when the market plunges, was making it worse, investors and analysts said on Thursday after the mechanism brought trade to an end for the second time this week.
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China’s stock market has skidded this year as the government prepares to remove measures that were introduced last year to prop up share prices after a meltdown in June.
The Chinese regulators had put into place a 15-minute trading halt when share indices fall by 5 percent, and closing for the day if the threshold of 7 percent is breached.
Shortly after USA stocks opened nearly 2 percent down, the Chinese securities regulator announced that the circuit breaker policies would be discarded because there had been too many steep loses.
“The efficacy of the circuit breaker is questionable in a highly volatile environment driven by a herd mentality”, noted Kamel Mellahi of Warwick Business School, according to CNN Money.
As designed, China’s system stopped trading for 15 minutes with a 5% move in the CSI 300 index of blue-chip stocks, and stopped trading for the day after a 7% drop.
The S&P 500 index gave up 47.17 points, or 2.4 percent, to 1,943.09.
The index lost 278.59 points, or 2.2 per cent, to close at 12,448.21, as commodity prices, including oil, continued to fall amid perceived weakness in the Chinese economy.
Markets will remain wary of China’s currency goals, as mixed messages come from the central bank, which has repeatedly said it sees no basis for the currency to depreciate, while steering it gradually lower.
And with just a 2 percentage point gap before the permanent halt, investors fear that “if they don’t sell early they won’t be able to, because the circuit breaker will kick in”, said Shane Oliver, head of investment strategy at AMP Capital in Sydney. The trading halt mechanism is based on whether that index swings more than 5 percent up or down.
The yuan firmed in early trade, with dealers suspecting that the central bank intervened through state-run banks to support its currency, which could help allay fears that any depreciation would be allowed to continue at pace.
CHINA RELIEF: Investors around the world were relieved Friday by a steadier tone in Chinese trading. The spot market opened at 6.5700 per dollar, and was trading at 6.5887 at 0313 GMT.
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A spate of weak economic releases in China and lower guidance rate for yuan by the People’s Bank of China in the past eight consecutive days had triggered concerns over a slowdown in China and the dependent economies. It has been trading at 11-year lows. Gold prices rose to a nine-week high of US$1,102.80 an ounce, before paring some gains to trade 0.4 per cent higher at US$1,098.70 in trading yesterday. Brent crude, used to price global oils, rose 39 cents to $34.14 a barrel in London. The dollar fell to 117.98 yen from 118.38 yen late Thursday.
