China’s stock market trade opened 2016 with a gruesome flashback to the summer slide in equities that prompted palpitations among regulators, a spate of vague accusations about foreign meddling, and a rash of policies including intervention in the €6 trillion share market.
With official economic growth in China still at just below 7 per cent, the markets are slow to embrace government moves to shift the economy from export-led to consumer and services-led.
The benchmark Shanghai Composite tumbled over 7.1 per cent on 2016’s first day of trading on Monday, and Chinese stocks halted trading for a second time on Thursday, after a 7 per cent plunge in the CSI300 index triggered a recently introduced “circuit breaker” mechanism, less than half an hour after Shanghai and Shenzhen starting trading.
“The renewed share suspension in China caused global shares to fall sharply on Thursday, with Wall Street opening more than 1 per cent lower and European markets trading 2 per cent down.”
So heavy was the impact of the circuit breaker, that the China Securities Regulatory Commission (CSRC) called the whole thing off, at least temporarily. "After weighing advantages and disadvantages, currently the negative effect is bigger than the positive one," it said in a statement.
In a sign of how sensitive the global markets are to movements in China, the suspension caused global shares to fall sharply, though losses in other markets were trimmed after the announcement.
China’s woes afflicted other Asian markets, and news that the North Koreans may or may not have tested a thermonuclear device also blasted sentiment in Asian equities, and beyond.
The terrible start for the markets combines with the worst beginning to the year for the Chinese yuan since 1994, on growing concerns that the economy is weakening further.
There is likely to be fairly heavy debate about the circuit-breaker in coming weeks. The CSRC told the Xinhua news agency that the circuit-breaker mechanism was designed to contain wild swings in the markets and “had calmed down investors and played a positive role”.
However, the CSRC conceded that the market was new to China and that the market needed time to adapt to it. “China will constantly improve the mechanism according to its implementation outcomes,” it said on Xinhua.
Fearful of a widescale sell-off by big companies, the regulator has extended rules, due to expire on January 8th, under which large shareholders ie, those holding 5 per cent or more, cannot sell more than 1 per cent of their holdings in a three-month period.
The CSRC introduced these rules on July 8th to help stabilise mainland Chinese equity markets after they lost nearly a third of their value in three weeks. A number of large state-owned enterprises are making voluntary pledges not to sell shares on the secondary market for a year. A portion of this altruism is no doubt inspired by the way CEOs are under scrutiny as part of the government’s anti-corruption campaign.
In Hong Kong, where superstition possibly plays a role, brokers are talking about a "black" debut, which could be a poor omen for the year.
Some traders are grumbling about the circuit-breakers too, saying they trigger too easily, encouraging people to sell more. "Clearly, the tight stops of 5 and 7 per cent has the magnet effect as prices gravitate towards the breaker and prompts a stampede that drains market liquidity," Hong Hao, chief strategist at the investment bank Bocom International, wrote.
The prospects for the Chinese economy are looking grim, although the picture is complex because consumption is expected to stay stable as investment falls, and the collapse in oil prices makes it difficult for the yuan to depreciate further.
