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January 8, 2016

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Home » Business » Finance

Regulator dumps circuit breaker

By Ye Zhen | January 8, 2016, Friday | Print Edition

CHINA’S securities regulator has suspended the use of a circuit-breaker system widely blamed for exaggerating market volatility and bringing trading in shares to a halt twice this week.

Trading closed just 29 minutes after the market opened yesterday when a massive sell-off again triggered the system.

It had come into force for the first time on Monday.

“Although the circuit-breaker system was not the main reason for market slumps, it failed to achieve the desired effect,” the China Securities Regulatory Commission said in a statement last night. “It has more negative impact than positive effects. Thus, in order to maintain market stability, the commission decides to suspend the system.”

The system was designed to provide the market with a cooling-off period, protect investors by helping them to avoid hasty decision making during market turmoils, depress volatility caused by automated program trading and offer a response time in technical emergencies, the regulator said. “However, the latest practices indicated the system has a ‘magnet effect’ that draws investors to sell shares as the index approaches limit thresholds and thus accelerate declines,” it said.

The commission said it would be working to improve the system.

Yesterday’s market slump followed a sharp devaluation in the yuan and fears about sales by major shareholders before the securities regulator unveiled new restrictions.

The benchmark CSI 300 Index dropped rapidly by 5 percent at 9:42am, triggering a 15-minute trading suspension. After trading resumed, the index plunged even faster by 7 percent in two minutes and trading was halted for the rest of the day at 9:59am.

The 7 percent decline in the Shanghai Composite Index brought its losses so far this week to 11.7 percent, the worst since the week ending August 21.

Both the Shenzhen Component Index and the ChiNext index of growth shares plunged more than 8 percent. More than 1,600 stocks in Shanghai and Shenzhen fell by the daily limit of 10 percent.

The yuan weakened to a five-year low after the People’s Bank of China set its guidance rate at the weakest level since March 2011.

It fueled fears of slower growth in the world’s second-largest economy after figures released earlier this week showed manufacturing activity had shrunk for the 10th consecutive month in December while the service sector had grown at its weakest pace in 17 months.

The commission introduced new rules yesterday to restrict selling by major shareholders.

A ban imposed on July 8 prohibiting investors with holdings of more than 5 percent, along with corporate executives and executives, to sell stakes for six months was due to expire today.

Under the new rules that will take effect tomorrow, major shareholders are not allowed to sell more than 1 percent of a listed company’s share capital within any three-month period. In addition, they will have to release their selling plans 15 trading days in advance of transactions.

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