China ready to tweak circuit-breaker rules

BEIJING • China's securities regulator signalled yesterday it is open to tweaking the country's new market circuit breakers after analysts blamed the rules for exacerbating a US$590 billion (S$840 billion) rout in stocks.

Policymakers need to "gradually explore, gain experience and make adjustment" to circuit breakers, China Securities Regulatory Commission (CSRC) spokesman Deng Ge said in a statement.

The trading rules, which halt exchanges for 15 minutes after a 5 per cent drop in the CSI 300 Index and for the rest of the day after a 7 per cent retreat, were triggered on Monday as stocks plunged in their worst start to a year.

While the CSRC reiterated that circuit breakers play an important role in stabilising the market, Citigroup, Deutsche Bank and Nomura Holdings said the rules failed to restore calm as investors scrambled to exit positions before getting locked in by the halts.

Changes suggested by analysts include widening the threshold for the first halt beyond 5 per cent and creating a bigger gap between trigger levels for the initial suspension and the full-day halt.

"This mechanism, as per the Chinese regulation body, aims to reduce A-share volatility," Mr Jason Sun, a strategist at Citigroup in Hong Kong, wrote in a report. "Instead, to a certain extent, it may raise short-term liquidity fears if investors are not able to cash in or out in a timely fashion."

Chinese shares began Monday with losses 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.

The first halt was triggered at 1.13pm local time, as losses in the CSI 300 reached 5 per cent. Investors rushed to sell after the suspension ended, with turnover peaking in the final minute before a 7 per cent slump froze trading in shares, futures and options for the rest of the day.

Policymakers proposed circuit breakers in the wake of a market crash that saddled many of the nation's 99 million individual investors with losses. The new mechanism adds to trading restrictions that include a 10 per cent limit on daily swings for individual stocks and a so-called T+1 rule preventing investors from buying and selling the same shares in a single day.

Unlike some measures to calm the US$6.5 trillion equity market over the summer, the Chinese authorities sought input from market participants when the circuit-breaker proposal was unveiled in September last year. They even made some changes to the rules, including shortening the length of the first halt to 15 minutes from 30 minutes, before implementing them for the first time on Monday.

The two trigger levels in China, which come within two percentage points of each other, are "likely too close to each other and added to investors' fears," wrote Ms Wendy Liu, strategist at Nomura in Hong Kong. "It would certainly be in offshore investors' interests to see regulators coming up the learning curve and being able to foster a well-thought out and regulated market that is big, liquid and non-volatile," she said. "It may take a couple of weeks for the dust over this 'short-circuit' incident to settle."

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A version of this article appeared in the print edition of The Straits Times on January 06, 2016, with the headline 'China ready to tweak circuit-breaker rules'. Print Edition | Subscribe