China will suspend automated stock trading halts

Critics say circuit breakers exacerbated the stock rout because investors expedite the selling for fears of being locked out. It’s the second time in four days that China’s new circuit breakers have been used.

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“Therefore, in order to maintain market stability, CSRC has made a decision to suspend the circuit-breaker mechanism”, a statement from the China Securities Regulatory Commission (CSRC) said.

The circuit breakers pause trading for 15 minutes if a key index falls 5 percent and stop it for the day with a decline of 7 percent.

So the bottom line is that whilst daily 7% limit down drops are not pretty, and foster much attention from the usually clueless mainstream media. In the first half-hour of USA trading, the Dow Jones index fell by more than 1.2 percent – and that was after clawing back 90 points of an initial drop.

“Thursday’s trading halt came too fast even for the “national team” to get ready”, Mr Nicholson added.

On Thursday, the Shanghai and Shenzhen exchanges were open for less than 15 minutes of trading overall.

“The moment circuit breakers take place, investors and traders can carefully reassess the situation and decide what they need to do”, he said, adding that circuit breakers kicked in across many major stock exchanges during the 2008 financial crisis. Instead, the mechanism itself may have played a leading role in this week’s downturn.

The early closure came as panic selling twice triggered the automatic and newly introduced “circuit breaker” mechanism. On Thursday, the 7 percent threshold was reached, halting all trading, less than half an hour in the entire trading day. For its part, China’s securities regulator shifted blame away from its now suspended system. “The negative effect of the mechanism outweighed its positive effect”.

China’s market turmoil has spread beyond its borders. Trading continued in Hong Kong, where stocks were down 2.4%.

If the index fell seven per cent, markets were suspended for the rest of the day.

“They’re just on the wrong track”, said Nicholas Brady, 85, a former U.S. Treasury secretary, who ran a committee that recommended the curbs on equity trading after the 1987 crash. If this week is any indication, China has set an ominous tone for 2016.

With official economic growth in China still running at just below 7 per cent, the markets are slow to embrace government moves to shift the economy from an export-led one to a consumer and services-led one. “I think its more of a move to try to improve, a technical adjustment that may end up with a better designed instrument down the road”.

However, the CSRC conceded that the market was new to China and that the market needed time to adapt to it.

Investors monitor stock prices in Beijing, Jan. 5, 2016.

On the currency front, policy makers have pledged to keep the yuan stable, drawing down a record $108 billion from foreign reserves to prop it up. China’s factory activity contracted for a 10th consecutive month in December, according to a private survey released Monday, signalling weakness in a crucial pillar of the Chinese economy.

China’s central bank responded Thursday by announcing it would pump $10.6 billion into the financial system.