While some analysts criticized the design of the circuit breaker, saying it inadvertently encouraged bearish sentiment, the CSRC said the mechanism had helped calm markets and protect investors – although it said the mechanism needs to be further improved.
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China moved to support its sinking stock market as state-controlled funds bought equities and the securities regulator signalled a selling ban on major investors will remain beyond this week’s expiration date, according to people familiar with the matter.
There are two threasholds for the circuit-breaker system in Chinese stock market: 5% and 7%.
The circuit breaker was triggered on both Monday and Thursday, as plunges in the Hushen 300 Index reached 7 percent in both trading days.
Chinese stock trading was suspended Thursday after “circuit breakers” kicked in following a steep plunge, in the latest spasm of investor panic on the country’s volatile markets. While major indexes opened more than 2.5 percent lower, they quickly recovered into positive territory.
“The circuit breaker is a magnifier, but not trigger, of market volatility”. As a result, it maytake time for market participants to get used to the new system. The new mechanism adds to trading restrictions that include a 10 per cent limit on daily swings for individual stocks and a so-called T+1 rule preventing investors from buying and selling the same shares in a single day.
The China Securities Regulatory Commission (CSRC) has asked big shareholders and the management, those who hold more than 5 percent of a company’s shares, not to offload more than 1 percent of the company’s shares within any three-month period, a regulation notice said.
The new rules will take effect on January 9.
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“Clearly, the tight stops of 5%/7% of China’s circuit breaker have a “Magnet Effect” as prices gravitate towards the breaker, and prompt a stampede that drains market liquidity”, Hao Hong, the chief China strategist at Bocom International Holdings Co., wrote in a report.
