The Chinese government yesterday removed a mechanism that automatically stops the trading of stocks when the markets fall too fast, after a sell-off forced them to close the exchanges for two days this week.
These so-called circuit breakers were widely blamed by analysts for sowing panic among the army of retail investors who drive most of the trading volume there.
Yesterday, nervous markets in China went into meltdown - dragging down share prices across the region with them - after the Chinese central bank again devalued the yuan.
Shares in Shanghai plunged 7 per cent in the morning session, while the Shenzhen bourse dived 8.24 per cent. Those dizzying falls triggered circuit breakers that shut down both markets within 30 minutes of the session's start.
Markets in Singapore, Hong Kong, Tokyo and Sydney were all mauled, while London and Wall Street were down in early trade last night.
Singapore's benchmark Straits Times Index lost 74.36 points or 2.65 per cent to 2,729.91, its lowest close since January 2012. Around $30 billion has been wiped off the value of local shares this week.
But late last night, a statement from the China Securities Regulatory Commission said it will suspend the circuit breaker mechanism. "Currently, negative effects of the mechanism are larger than positive effects. Thus, the China Securities Regulatory Commission decides to suspend the circuit breaker mechanism to maintain market stability," its spokesman Deng Ke said in a statement.
The circuit breakers, which kick in after the stock index falls by more than 7 per cent, is meant to allow for a halt in trading and restore calm in the market.
Instead, analysts said it caused more panic as people lined up to sell their stocks as soon as the halt was ended, triggering a herd-like behaviour to sell even faster.
"Markets should be left to their own devices and such measures, if anything, exacerbate the situation and seem to be panicky responses," said Aberdeen Asset Management managing director Hugh Young.
The sell-off yesterday came after signs of stabilisation emerged on Wednesday amid news that the Chinese government would continue to intervene in the markets to prevent major shareholders from dumping stocks.
But the calm was shattered when the People's Bank of China further reduced the yuan's midpoint rate against the US dollar. This sent the currency to its lowest since 2011.
Investors also had to digest further falls in the oil price and renewed concerns over global growth, with the World Bank lowering its forecast for this year from 3.3 per cent to 2.9 per cent.
Investors are instead turning to safe havens. Gold prices rose to a nine-week high of US$1,102.80 an ounce, before paring some gains to trade 0.4 per cent higher at US$1,098.70 in trading yesterday.
Renowned investor Jim Rogers said the volatile outlook hardly spells a doomsday scenario.
"I am still long on sectors of the Chinese economy where the government spends a staggering amount of money - pollution control, for instance," Mr Rogers said.
