CHINA’S stock market got off to a dramatic start in 2016 as its newly installed circuit breaker, a system designed to contain wild market swings, seemed to have worked in an opposite way.

The circuit breaker mechanism forced China’s stock market to close early again yesterday, the second time since the system was put into effect on Monday.

The trading was halted for the day around 10am, just 30 minutes after the market opening, after the benchmark CSI 300 index hit the limit of 7 percent. An earlier 15-minute suspension from 9:42am failed to stem the decline.

On Monday, the first trading day of the year, China’s stock market tumbled unexpectedly and in dramatic fashion. The plunge triggered the system that was put into effect on the same day and forced the market to close early for the first time in its 25-year history.

The plunge overwhelmed retail investors who anticipated a rosy start for the New Year.

“I didn’t even realize that the circuit breaker had come into effect on Monday until I found all stocks on my mobile phone screen stopped beating prices,” said Lin Shiguang, a 48-year-old taxi driver.

Lin was caught off guard as he had been gradually increasing his stock holdings during the last week of last year betting on historical data showing China’s stock market tends to rise on the first trading day of a year.

On Monday, the CSI 300, which tracks the stock prices of 300 largest companies listed in Shanghai and Shenzhen, extended a drop in the afternoon session to 5 percent and triggered a 15-minute trading suspension in all stocks, index futures and other equity-related securities from 1:12pm.

After trading resumed, the market plunged even faster, with the CSI 300 falling 7 percent in just a few minutes. It activated a stricter circuit breaker that forced the market to close at 1:33pm, nearly an hour and a half early from its normal schedule.

One of Lin’s stocks fell around 1 percent as the first circuit breaker was turned on Monday. Lin was planning to sell his holdings to limit losses after the market reopened, but the stock plunged even more quickly by over 8 percent in minutes.

When he changed his mind, planning to increase holdings at a lower price, the trading was halted again for the remainder of the day.

“The worst part was not suffering from losses, but the inability to do anything about it,” Lin said.

The market was depressed by a flurry of bad news, including weaker-than-expected economic data and further weakening in the yuan. Investors were also spooked by a scheduled lifting of a ban on share sales by major stakeholders today.

However, the circuit breaker system was blamed for exacerbating the market’s plunge.

“We think the sell-off was more due to unstable market psychology, while the circuit breaker mechanism, to some extent, magnified the market’s anxiety, resulting in an overreaction,” said Gao Ting, strategist with UBS Securities.

China unveiled the circuit breaker proposal in September after a massive summer rout sent the Shanghai key index diving by more than 40 percent. The system is supposed to smooth market volatility by providing a cooling-off period for investors during drastic market fluctuations.

System flaws

Under the rules, a move of 5 percent in the CSI 300 triggers a 15-minute trading halt, while one of 7 percent triggers a trading halt for the rest of the day.

Analysts pointed to flaws in the system.

“The circuit breaker that China just introduced has a low hurdle that can be easily triggered, given the intense volatility in this market,” said Hong Hao, chief strategist at BOCOM International.

China has one of the world’s most volatile stock markets where retail investors account for around 80 percent of trades. In 2015, there were 13 trading days when the CSI 300 index moved more than 5 percent, and 11 trading days that it moved over 7 percent, according to data calculated by Ping An Securities.

The United States instituted the circuit breaker mechanism in late 1980s in the wake of 1987’s “Black Monday,” the day when the market tumbled 22.6 percent. The mechanism was triggered only once in 1997. It has been widely adopted by a number of countries including South Korea, Japan and India.

However, the circuit breaker in the US has three thresholds of 7 percent, 13 percent and 20 percent, while India sets three thresholds at 10 percent, 15 percent and 20 percent.

Hong said the 5 percent and 7 percent thresholds in China are too close to each other and the anticipation of a further plunge will prompt a “selling stampede” before the second breaker is triggered.

The circuit breaker also adds to market liquidity curbs as China has imposed several control measures including a 10 percent daily limit on individual stock price movements and a T+1 trading rule which prevents investors from buying and selling shares on the same day. “Under the T+0 trading rule, investors can do intraday trading to mitigate losses from their previous investment decisions,” Wendy Liu, an equity strategist of Nomura, wrote in a research report.

“Under the T+1 trading rule adopted by China, potential stock buyers may hesitate as they won’t be able to change their decision if the stock prices fall further.”

Chang Yuliang, analyst with Deutsche Bank, noted that the use of CSI 300 index as the benchmark for the circuit breaker would exaggerate the influence of policy-makers on market trading.

Dominated by large-cap old-economy stocks such as financials, properties and industrials, the CSI 300 is more sensitive to macro-economic developments and policy dynamics than small-cap new-economy stocks.

“This suggests that, going forward, macro conditions and policy-makers could have a greater influence on market trading,” Chang said, adding that any strongly dovish or hawkish macro-policy surprises may drain liquidity and cause the CSI 300 to hit the stop-threshold.

In response to criticisms, the China Securities Regulatory Commission defended the importance of the circuit breaker in calming down the market but added that the government would work to improve it.

“The circuit breaker is new to China. The market needs some time to gradually adapt to the new rules,” the CSRC said in a statement on Tuesday.

However, market watchers said the circuit breaker system is not the right solution to excessive volatility in China’s stock market.

“Excessive interference with trading will affect market efficiency and may backfire on market stability,” Lin Caiyi, chief economist of Guotai Junan Securities, wrote on her blog.

“Factors including unreasonable investor structure and irrational investment culture are the root cause of wild swings, which can never be resolved by circuit breakers.”