Following an embarrassing 45% plunge over the past six months, wiping over $5 trillion from the value of listed firms, the head of China’s stock market regulator, Xiao Gang, has reportedly offered to resign.
According to Reuters, citing sources familiar with the development, Xiao, 57, tendered his resignation as the China Securities Regulatory Commission (CSRC) chairman last week after his brainchild – a “circuit breaker” mechanism to limit market losses – was blamed for exacerbating a sharp sell-off in the first week of January.
On the day the new circuit breaker mechanism was first introduced, January 4, Chinese stocks plummeted by more than 5% shortly after the mid-session break, requiring the market to be halted for 15 minutes based on the new market rules. Upon the resumption of trade, stocks continued to plummet, dropping by as much as 7%, triggering an early end to trade.
Amplifying that embarrassment, just four days later, the same outcome occurred again, only significantly quicker.
On January 7 stocks opened only to fall 5% in the first 13 minutes of trade. After being halted for 15 minutes, stocks continued to cascade lower, hitting the maximum down limit of 7% that triggered an early end to trade.
As the tweet below reveals, excluding the 15 minute trading halt, the length of the session could be measured in seconds, not minutes or hours.
By my calculations, trade in Chinese stocks, excluding the trading halt, lasted 857 seconds today… Enjoy the rest of your day!
— David Scutt (@David_Scutt) January 7, 2016
Chris Weston, chief markets strategist at IG Markets in Melbourne, summed up the problem with the circuit breaker perfectly on the day.
“The distance between the initial 5% circuit break (the 15 minute window) and the full halt of the market at 7% is just way too narrow,” Weston told Business Insider.
“When the market hits 3.5% to 4% we see everyone panic and put in their sell orders. When the 15 minute window ceases the market shoots through to 7% straight off the bat.”
The embarrassing outcome, not once but twice, led the CSRC to scrap the circuit breaker after just four sessions of trade. It also contributed to heightened investor nervousness, leading the benchmark Shanghai Composite to fall by more than 20% since late December.
This tweet from Patrick McGee of the Financial Times reflects the folly expressed by market participants at the time.
— Patrick McGee (@PatrickMcGee_) January 8, 2016
It was an embarrassment of epic proportions, following other questionable decisions from regulators such as preventing some participants from selling, forcing some to buy along with investigating and arresting those who maliciously sold stocks or stock index futures.
Understandably, government officials appear uneasy at the actions undertaken to address the nation’s stock market slide.
“The (Communist Party) central (leadership) is extremely unhappy with Xiao Gang. It is certain he will change jobs,” a source close to the party’s leadership told Reuters.
“The party’s Organisation Department, or personnel ministry, has short-listed three candidates to succeed Xiao.”
On their Weibo account, a Chinese microblogging site similar to Twitter, the CSRC attempted to hose down speculation that Xiao had resigned.
“This information does not conform to the facts,” it wrote.
You can read more here.