Channel NewsAsia

China to launch stock market circuit breaker system in 2016

China will introduce a circuit breaker for the country's stock indexes on January 1, according to a statement by the Shanghai Stock Exchange on Friday.

SINGAPORE: China will introduce a market-wide circuit breaker system next year, a statement from the Shanghai Stock Exchange said late Friday afternoon, as the country’s stock markets struggle to recover from a precipitous drop earlier this year. 

A circuit breaker imposes a trading suspension or freeze if an index falls by a pre-determined level. It is usually put in place to curb panic in markets. 

The mechanism announced Friday will be tied to the CSI300 Index, which tracks the largest listed companies in Shanghai and Shenzhen. A move of 5 per cent in either direction from the benchmark's previous close will trigger a 15-minute trade suspension across the country's stock indexes if the move occurs before 2.45 pm local time. After that, a 5 per cent move will prompt a trade suspension until the market closes at 3.00 pm. 

Moves of 7 per cent in the index will spark a trading halt for the rest of the day. 

“The implementation of circuit breakers will be a step further in perfecting the country’s securities and futures market trading mechanism, maintaining market order, protecting investors’ interests and facilitate the stable and healthy development of the capital market in the long run,” the statement said late Friday.

The idea of a circuit breaker mechanism was first proposed in September and the public was given until Sept 21 to give their feedback.

Good or bad?

Analysts who spoke to Channel NewsAsia said the decision by the Chinese exchange did not come as a surprise.

“The Chinese government clearly were not happy with how little control they had over halting the market selloff and any policies that [may] dent volatility will be quite appealing to them,” spreadbetter IG’s market analyst Angus Nicholson said in an e-mail interview.  

However, there are analysts who feel that the introduction of a circuit breaker may cause “more extreme market moves,” making an already volatile equity market even harder to navigate.

“Market moves with good reasons, and circuit breaker might actually cause more extreme market movements because investors would fear being too slow to react to good or bad news. And it won’t help shoring up investor confidence. Circuit breaker, like the 10 per cent daily limit rule, don’t make owning stocks safer,” Daniel So, strategist at CMB International, said. "They only make it harder to exit when necessary."

Under current rules, individual stocks and index futures in China are allowed to rise or fall a daily maximum of 10 per cent from the previous closing level. Trading of a stock stops when it hits the daily maximum allowable limit.

Friday’s announcement follows an array of rescue measures that has been put in place to bolster market confidence, after equity markets in China tumbled nearly 30 per cent from their Jun 12 peak.

Among the rescue measures were a temporary halt on initial public listings (IPOs) and large share purchases by state-run funds. Beijing has also stepped up rule enforcement. Last month, three of the nation’s largest brokerages came under investigation for alleged rule violations. 

On Friday, the benchmark Shanghai Composite closed down 1.66 per cent at 3,525.40 points, in line with a regional market selloff sparked by a monetary policy decision from the European Central Bank (ECB) that fell short of expectations.