Chinese regulators left red-faced over shortest trading day

China’s stock markets regulators have abandoned a controversial ‘circuit breaker’ system which led to trading being halted just 29 minutes after the bell, making January 7, 2016, China’s shortest trading day since the Shanghai stock exchange, shuttered for decades under Chairman Mao, re-opened in 1990.

The early closure came as panic selling twice triggered the automatic and newly introduced ‘circuit breaker’ mechanism. The first pause in trading, once shares fell 5 per cent, lasted the stipulated 15 minutes and was designed to calm volatility.

The second suspension, ending trading for the day, quickly followed as stocks plunged 7 per cent. The new system which was only put into practice this week, was likewise triggered twice on Monday, the first day of trading this year.

China’s investors and brokers were not pleased. Fund managers had been lobbying the market regulator in Beijing to change the system, news portal Tencent reported yesterday. Now it seems embarrassed officials have temporarily suspended the suspension system in a further sign Chinese authorities are struggling to liberalise markets.

“The system triggers more volatility rather than reducing volatility,” said Chen Long, an analyst at Gavekal Dragonomics, a Beijing-based consultancy. “The only effective solution is for CSRC to say ‘we will not use it anymore’, but that would be saying ‘we were stupid’, and that’s not the typical way Chinese officials react,” he said.

While circuit breakers operate in developed, Western markets, which Beijing wishes to emulate, “the mistake is that China is different from developed markets, and the intra-day volatility is very high,” said Mr Chen.

China’s stocks often plunged 5 per cent last year but recovered in the same day. Now, when the market is down 4 per cent, fear of the suspension triggered at 5 per cent deepens panic and encourages more selling, making the halt more likely. Once it reopens, investors rush to sell before the next, seemingly inevitable suspension as the market falls another two points.

The mayhem sparked some black humour online about China’s markets, long considered a casino. “Are you still going to the A share market?” asked one poster on the news portal. “I’m going to Las Vegas tomorrow. Playing Texas poker is more reliable.”

“This is insane,” Chen Gang, chief investment officer at Shanghai Heqi Tongyi Asset Management, told Bloomberg yesterday. “We were forced to liquidate all our holdings this morning,” said Mr Chen, whose firm manages about $45.5 million. He wants the regulator to extend the 15-minute break to half an hour.

The new mechanism propelled Thursday’s fall but “the Chinese stock market’s problems are more fundamental than technical,” said Jin Yinsong, an investment adviser at China Investment Securities. “Even without the circuit breaker, today’s trading would still be downwards.”

Authorities should focus on doing their regular, supervisory work well, and improve transparency, rather than focusing on short-term stimulatory measures, said Mr Jin. Officials respond too strongly to the public expectation that the government will intervene, he said.

China doesn’t need circuit breakers, as individual stocks already stop trading when they move 10 per cent in either direction, said Fraser Howie, a Singapore-based analyst and author of ‘Privatising China’. The current volatility is caused more by mixed messages from authorities, such as over yuan devaluation, and the government’s refusal “to allow the market to clear itself,” he said. “It’s a very warped and distorted market, and the outcome is days like today.”