CSRC:China suspends stock market “circuit breaker”
China announced Thursday night that it will from Friday suspend the stock market “circuit breaker” mechanism that has been implemented since the beginning of this year.
“Currently, the negative effects of the mechanism are greater than the positive effects. Thus, the China Securities Regulatory Commission (CSRC) had decided to suspend the circuit breaker mechanism to maintain market stability,” CSRC spokesperson Deng Ke said in a statement.
Under the mechanism that became effective on Jan. 1 to tame the wildly fluctuating Chinese stock market, trading will be halted for 15 minutes if the Hushen 300 Index, which reflects the performance of bluechips listed in Shanghai and Shenzhen, moves up or down by 5 percent before 2:45 p.m. If the movement reaches 7 percent when trading is resumed, the market closes for the day.
The circuit breaker was triggered on both Monday and Thursday, as plunges in the Hushen 300 Index reached 7 percent in both trading days.
“The mechanism was introduced with the aim of providing a calm-down period for the market to avoid or reduce hasty trading decisions in the case of sharp fluctuations, protecting the interests of investors. It also provides time for dealing with technological and operational risks,” Deng said.
He said the mechanism “is not the major reason for the market plunge, but it failed to achieve the anticipated effects,” adding that the mechanism in effect accelerated the plunge as some investors decided to sell when the index’s drop neared 5 percent or 7 percent.
The CSRC decided to introduce the circuit breaker system and conducted a public consultation on the plan for its introduction in September 2015 to prevent further abnormal fluctuations.
The benchmark Shanghai Composite Index surged about 154 percent from July 2014 to as high as 5,178 points on June 12, 2015, but then plunged about 45 percent from the peak by Aug. 26, 2015. The sharp falls gave rise to calls of a “circuit breaker.”
The new mechanism would help prevent excessive reactions of investors and give them more time to confirm whether a stock’s price is reasonable, according to the plan.
With no precedent, the market has taken time to adapt. “Next, the CSRC will carefully sum up the experience and lessons, organize research on improving the mechanism and seek extensive public opinions,” Deng said.
Trading on the Shanghai and Shenzhen bourses stopped early on Thursday after shares tumbled 7 percent within the first 30 minutes of trading, triggering the circuit breaker mechanism. It was the shortest trading time in the history of China’s stock market.
At 9:42 a.m., trading was suspended for 15 minutes after the Hushen 300 dropped by over 5 percent. The index dived a further 2 percent in just 2 minutes after reopening at 9:57 a.m., and trading was ceased.
Following the trading suspension Thursday, the CSRC unveiled new rules to limit big shareholders from selling their stocks.
Big shareholders, the management and those who hold more than 5 percent of a company’s shares were asked not to sell more than 1 percent of the company’s shares within any three-month period, a notice said.
Those who want to reduce their holdings have to publicize their plans 15 trading days beforehand. The new rule will take effect on Jan. 9.
On Thursday, several state-owned enterprises, including China Aerospace Science and Industry Corporation and China National Offshore Oil Corporation, announced that they will not sell shares of listed companies they control in order to help maintain market stability.