HONG KONG—The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting China’s new market circuit breakers to the test on their first day.
Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 per cent. An earlier 15-minute suspension at the 5 per cent level failed to stop the retreat, with shares extending losses as soon as the market re-opened. Traders said the halts took effect as anticipated without any major technical problems.
The world’s second-largest stock market began the year on a down note 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. Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990.
“This is a pretty dramatic start of trading for the year,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which manages about $45 billion. “Some investors may have been unwinding their positions when trading volumes were light. That could have exaggerated the moves. The market has been very difficult to predict.”
Monday’s selloff rippled through regional equity markets, with Asian shares and U.S. equity-index futures extending losses. Chinese stocks’ influence on global markets has increased after the nation’s $5 trillion equity market rout, from mid-June through August, rattled investor confidence in the world’s second-largest economy.
Brokerages were prepared for the circuit breakers after conducting tests on the new mechanism last month, according to William Wong, the head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. About 595 billion yuan ($89.9 billion U.S.) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.
Under the circuit breaker rules finalized last month, a move of 5 per cent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 per cent closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02 per cent before trading was suspended. The Shanghai Composite Index lost 6.9 per cent.
Individual investors in China, who drive more than 80 per cent of trading, may have rushed to sell after the first circuit breaker took effect to avoid getting stuck in positions by the 7 per cent suspension, according to Andrew Sullivan, managing director for sales trading at Haitong International Securities Group in Hong Kong. It took just seven minutes for the second halt to come into effect as shares tumbled after the first suspension ended, according to data compiled by Bloomberg.
Investors need time to get used to the new mechanism, according to Zhang Gang, a strategist at Central China Securities Co.
“The circuit breaker intensifies selling pressure and panic sentiment as the index approaches thresholds because investors aren’t familiar with it,” Zhang said from Shanghai. Such routs may eventually be seen by money managers as good buying opportunities, especially for large-cap companies, he said.
Chinese shares listed in Hong Kong, which aren’t affected by the circuit breakers, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated as much as 4.4 per cent, before closing 3.6 percent lower.
The China Securities Regulatory Commission announced July 8 that investors with holdings exceeding 5 per cent, along with corporate executives and directors, would be prohibited from selling stakes for six months. The rule, which followed the suspension of initial public offerings and curbs on short- selling, was intended to stabilize capital markets amid an “unreasonable plunge” in share prices, according to the securities regulator. The CSRC hasn’t yet specified whether the ban will be lifted.
“There will be greater pressure from institutional investors once the ban on share sales is lifted,” Pang said. The government probably didn’t intervene to prop up shares today “as it needs to see how the market will cope with new changes in trading system.”