China’s securities regulator signaled it is open to tweaking the country’s new market circuit breakers after analysts blamed the rules for exacerbating a US$590 billion rout in stocks on Monday.
Policymakers need to “gradually explore, gain experience and make adjustment” to circuit breakers, China Securities Regulatory Commission spokesman Deng Ge (鄧舸) said in a statement yesterday.
The trading rules, which halt exchanges for 15 minutes after a 5 percent drop in the CSI 300 Index and for the rest of the day after a 7 percent retreat, were triggered on Monday as stocks plunged in their worst-ever start to a year.
While the commission reiterated that circuit breakers play an important role in stabilizing the market, Citigroup Inc, Deutsche Bank AG and Nomura Holdings Inc said the rules failed to restore calm on Monday as investors scrambled to exit positions before getting locked in by the halts.
Changes suggested by analysts include widening the threshold for the first halt beyond 5 percent and creating a bigger gap between trigger levels for the initial suspension and the full-day halt.
“This mechanism, as per the Chinese regulation body, aims to reduce A-share volatility,” Citigroup Hong Kong-based strategist Jason Sun wrote in a report. “Instead, to a certain extent, it may raise short-term liquidity fears if investors are not able to cash in [and] out in a timely fashion.”
Chinese shares on Monday began with losses after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders at the end of this week.
The first halt was triggered at 1:13pm as losses in the CSI 300 reached 5 percent. Investors rushed to sell after the suspension ended, with turnover peaking in the final minute before a 7 percent slump froze trading in shares, futures and options for the rest of the day.
“Clearly, the tight stops of 5 percent [and] 7 percent of China’s circuit breaker have a ‘magnet effect’ as prices gravitate towards the breaker and prompt a stampede that drains market liquidity,” Bocom International Holdings Co (交銀國際控股) chief China strategist Hao Hong (洪灝) wrote in a report.
Policymakers proposed circuit breakers in the wake of a market crash that saddled many of the nation’s 99 million individual investors with losses.
The new mechanism adds to trading restrictions that include a 10 percent 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.
Unlike some measures to calm the US$6.5 trillion equity market over the summer, Chinese authorities sought input from market participants when the circuit breaker proposal was unveiled in September last year.
They even made some changes to the rules, including shortening the length of the first halt from 30 minutes to 15 minutes, before implementing them for the first time on Monday. Traders said the halts took effect as anticipated without any major technical problems.
China’s threshold for trading halts looks “quite tight” versus circuit breakers in other markets, Deutsche Bank strategist Yuliang Chang said. In the US, trading is halted temporarily after declines of 7 percent and 13 percent in the S&P 500, and only suspended for the rest of the day if the losses reach 20 percent.
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