China's stock market won't be halted anymore

Picture: Getty Images

China’s stock market won’t be halted anymore.

For now.

According to Bloomberg, China’s security regulator — the China Securities Regulatory Commission, or CSRC — said on Weibo that the so-called circuit-breaker rule that brought an early end to trading twice this week would be suspended. (Weibo is basically Twitter in China.)

On both Monday and Thursday, trading in China’s benchmark CSI 300 index was halted for the day after a 7% drop from the time markets opened. Thursday’s complete trading session lasted just 29 minutes, including a 15-minute halt in trading that was triggered after an initial 5% drop in the index.

These circuit-breaker rules — which US markets also have — are put in place to stop trading in the event of some malfunction in equipment or to stem a market panic.

The past few days of action in China have indicated more of the latter more than the former.

But as Chris Weston, chief markets strategist at IG Markets in Melbourne told Business Insider Australia, this week’s action exposed some flaws in these rules.

For one, the distance between the level that triggers a temporary halt — a 15-minute pause takes place after a 5% drop — and a full-day stop, which happens after 7%, is simply too narrow.

“When the market hits 3.5% to 4% we see everyone panic and put in their sell orders,” Weston told Business Insider Australia. “When the 15-minute window ceases, the market shoots through to 7% straight off the bat. The distance between the two needs to be wider — otherwise we are going to see this happen time and time again.”

Bloomberg News’ report on the chaos that broke out in the Chinese stock market on Thursday also captured this feverish rush to sell that Weston mentioned.

As Wei Wei, an analyst at Huaxi Securities in Shanghai told Bloomberg, “We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit breaker … We are also feeling at a loss and confused today as we didn’t quite figure out what was going on in the market.”

And so while, again, the circuit-breaker rules are in place to contain a panic in markets, there is also a sense that markets need at least some time to sort themselves out.

Certainly the stock market is a highly managed situation in China. And as Business Insider Australia’s David Scutt detailed earlier this week, China’s government has moved to ban stock sales from large shareholders in an effort to keep markets afloat. (And, thinking along these lines, it’s possible the circuit breaker could be put back into effect without notice, too.)

But the entire premise of even having markets — whether they be markets in oranges or stocks — is that the market itself will give participants, the buyers and the sellers, time to find one another. When trading takes place for only 10% of what’s anticipated, that mechanism would seem to break down.

On Thursday morning, stocks in the US were selling off as global markets deal with the aftershocks from the chaos in China. And while the circuit-breaker rules are in place to keep panics from spreading, it seems that perhaps Chinese authorities think the opposite effect has been achieved.

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