SHANGHAI (AFP) - China's short-lived stock circuit breaker, scrapped after only four days, demonstrates the communist state's enduring distrust of the markets and its instinct to intervene, analysts said Friday (Jan 8).
The mechanism - which halted trading on the Shanghai and Shenzhen exchanges if shares moved sharply - was originally aimed at limiting volatility, but it had the opposite effect, causing investors to panic and send the markets down.
The China Securities Regulatory Commission, the market watchdog, abruptly announced late on Thursday that the circuit breaker would be suspended because of a "negative" effect.
With global worries rife over China's slowing economy, the market and policy chaos, coupled with a creeping depreciation in the currency, have given investors worldwide an unsettling reminder of last year.
Then, stocks collapsed as a debt-fuelled bubble burst prompting an unprecedented government bail-out, and authorities launched a shock devaluation of the yuan.
"The government's good intentions went awry," Haitong Securities analyst Zhang Qi told AFP of the circuit breaker.
"There was controversy about the policy from the beginning," he said, adding: "It's not clear whether regulators tested the system and compared it with foreign practices before implementation."
Other global bourses, such as New York, have circuit breaker mechanisms, but their triggers are generally set far higher than China's - which is a 15-minute trading halt for a five percent rise or fall, and an end to the day's trading for a seven percent move.
That happened twice in the four days it was in place.
The Asian giant's exchanges were already notoriously volatile, and analysts say circuit breakers work better in mature markets.
With most Chinese traders being individual investors, the market halts caused them to rush for the exits to avoid being caught in a larger fall.
"The mechanism should have never been put in place to begin with. From the get-go it appeared ill-conceived," Gordon Chang, an author and independent commentator, told AFP.
Individual stocks have been limited to rising or falling 10 per cent a day for almost 20 years in China.
Analysts said the very idea of a circuit breaker was another sign policymakers were reluctant to let market forces set the true level of share prices - worried that a collapse could spark social unrest and hurt the real economy.
"What they are actually doing is strengthening the state across the board," said Fraser Howie, co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise".
"Reform isn't coming. There is no plan for markets as a decisive role," he told AFP, alluding to a 2013 pledge by the Communist Party.
Last year's rescue package was textbook heavy-handed state interventionism: regulators barred major shareholders from selling, allowed hundreds of companies to freeze trading in their stock and funded a "national team" to buy for the government, at a cost estimated in the hundreds of billions of dollars.
"Beijing has its work cut out to salvage its reputation for competent economic management," said Tom Rafferty, lead analyst for China of the Economist Intelligence Unit.
"The authorities staked a huge amount on propping (up) the markets in mid-2015 - an unwise decision given stocks appeared grossly overvalued - and we are now seeing the situation unravel again," he said in a statement.
This week's stock gyrations have come as the central bank guided the yuan currency down, setting its daily fix lower for eight sessions, representing a 1.4 percent fall, before a slight reversal on Friday.
One analyst called the move a "drip-feed devaluation" which was raising worries over China's slowing economy, bigger capital outflows and the threat of a currency war.
In August last year, the central bank moved the yuan down nearly five per cent over a week, saying the drop was a result of reforms aimed at making the unit more flexible.
"There is certainly a sense that the situation is spiralling out of control," chief Asia economist for Capital Economics, Mark Williams, said in reference to the currency.
He believes China is seeking stability for the yuan, but will likely have to intervene to convince the market that the currency is not just a one-way bet to fall.
"The PBOC (People's Bank of China) hopes to keep the renminbi broadly stable... but has botched communication of its policy," Mr Williams said in a research note.