China’s Securities Regulation Commission has made an announcement on the implementation of the circuit-breaker mechanism come January 1, 2016, in its bid to curb the volatility of the world’s second-largest equity market.
For several months, China has been having trying to prevent a stock market meltdown and the latest development revealed on Friday was one measure Chinese regulators are serious about. They announced the suspension of trading in the presence of wide price swings.
With the mechanism, there will be a 15-minute hold on trading if the CSI 300, a free-float weighted index with 300 listed A-share stocks, either shoots up or plummets by 5 percent. The proposal was made several months ago but the announcement made it formal.
The market-wide circuit breaker mechanism was first used by the United States following a crash in the U.S. stock market in 1987. If there will be index swings of 5 percent, trade suspension will be applied until closing of the market at 3:00 pm.
Circuit breaker mechanism is a common practice of Asian countries on stock markets. Unlike the 15 minute proposed suspension in China, Thailand observes a 30 minute halt on trading if the market index decreases within a certain percentage when compared to the closing of stocks a day before.
Since July, China has been taking extreme measures to bail out the stock market and this mechanism is its way to bounce back after the slump of the prices in June triggered an expensive attempt of the government for an intervention that cost multi-billion dollars.
These attempts also include introducing ways to prevent the market from taking a plunge such as restricting new stock offerings. Moreover, trading suspension will roll over the following day if the market swings for the day yields an average of more than 7 percent despite temporary suspensions.
Stock exchanges websites in the southern city of Shenzhen as well as Shanghai gave out statements explaining the necessity of temporary trading suspensions for market stabilization, investor protection and healthy and orderly market development promotion.
During last year’s fourth quarter, the point of reference of the Shanghai Composite Index rose more than 150 percent when state media revealed share prices are down. Investors expected Beijing to increase prices when necessary.
Enthusiasm died down when banking rules changed in the early part of June and investors made assumptions of Beijing withdrawing its support.
Meanwhile, China stocks increased for the fourth straight day on Thursday and made a recovery from most of the 5 percent loss the previous Friday. This showed a 20 percent increase since early August with the intervention of Beijing. The Shanghai index also suffered a 30 percent decrease some weeks prior.
The freeze in new stock sales implemented in July for a period of time resulted to the pulling out of supposedly 28 initial public offerings but the moratorium will end on November 6.
In an attempt to reinvigorate the stock market, a group of state entities invested on shares. This was from a report by Goldman Sachs in August which said that approximately 860-900 billion yuan or $135-$140 billion was spent by the entities.