In a desperate attempt to put a stop to rapidly falling stock prices, China once again prematurely closed its shares trading market via a “circuit breaker” closure. This was the second time this week that the Chinese market has had to take such a drastic action. As a result of the frequent market shutdowns, China has suspended its new circuit breaker policy until further notice.
When the Chinese market opened on Thursday, shares quickly plummeted by 5%. This prompted a circuit breaker closure that lasted for 15 minutes.
But things got even worse when the markets reopened, as the benchmark CSI300 fell past 7%. This resulted in an automatic trading shutdown for the remainder of the day. In total, trading in China on Thursday only lasted about 15 minutes.
Under the recently suspended rules, Chinese markets have been automatically shut down using “circuit-breakers” whenever stock prices started drastically falling. This was to prevent people from panicking and rapidly selling their holdings. It is unknown when or if this policy will resume.
Many experts believe that the new circuit breaker rules have been ineffective and that they will need to be adjusted before they are put in place. Before the suspension, it seemed that any loss could have triggered a circuit-breaker incident. When stock prices fall, people tend to panic and sell. Despite the share-buying efforts from state-owned financial institutions, China could not prevent such crashes when stock prices started to tumble.
Chief markets strategist at IG Markets in Melbourne Chris Weston stated, “The distance between the initial 5% circuit break and the full halt of the market at 7% is just way too narrow. When the market hits 3.5% to 4% we see everyone panic and put in their sell orders. When the 15 minute window ceases the market shoots through to 7% straight off the bat.”
Weston believes that widening the 15 minute window could help solve the problem.
He continued, “The distance between the two needs to be wider otherwise we are going to see this happen time and time again. I would look at a full halt at 9-10% and sufficient breathing room that the national team can convince people to buy after 5%. Failing that they can remove the breakers and allow the market to fall to a level that many feel reflects economic reality.”
With the awful market in China, expect markets throughout the world to have a poor showing on Thursday. These new circuit-breaker policies have only highlighted China’s terrible start to 2016.