China Stock Trading Triggers ‘Circuit Breaker’ After Selling Frenzy On The First Day Of Trading In 2016

The first day of trading at China’s stock exchange turned out to be a selling frenzy. The Chinese stock trading had to be halted abruptly by a “circuit breaker” after the exchange CSI300 witnessed heavy selling.

CSI300, China’s primary stock and bonds trading platform, was halted by a circuit breaker that was triggered after the market plunged by more than 7 percent in the few hours of the first day of trading in 2016. The stock market was completely shut down for the day by 1:34 p.m. local time on January 4.

Although the percentage might not sound much, considering the fact that, collectively, the market is worth more than $7 trillion of equities, futures, and options, quite a few billions of investor wealth vanished into thin air within half a day of trading. About 595 billion yuan ($89.9 billion) of shares are expected to have changed owners on mainland exchanges before the circuit breakers were triggered. The Shanghai Composite Index lost 6.9 percent.

Incidentally, the worst-ever start to a year for Chinese shares put the nation’s new market circuit breakers to the test on their first day, reported Bloomberg. The regulators attempted to temporarily suspend the trading, but the 15-minute suspension at the 5 percent fall failed to stop the plummeting shares. As shares continued their free-fall, all trading ceased for the day after the bigger circuit breaker was triggered as the market fell beyond 7 percent. Although the new circuit breakers were tested to their limits on the very first day of trading in the New Year, traders and regulators said the halts took effect as anticipated without any major technical problems.

China’s stock market is the world’s second-largest and, as expected, its collapse triggered gloom across the globe. Other stock markets around the world reeled, spiking demand for safe-haven assets such as government bonds. U.S. equity index futures were between 1.8 percent and 2.2 percent lower, suggesting a sharp drop at the market open, reported Yahoo News. In fact, U.S.-listed shares of Chinese companies like Alibaba Group Holdings Ltd. and Baidu Inc. dropped 4 percent each in premarket trading, reported Reuters. The iShares China Large-Cap ETF was off 3.3 percent.

China’s stock trading suffered a similar sell-off in August 2015, but this drop is considered even steeper. Market experts feel the selling frenzy started because of weak economic data about the manufacturing sector. Data showed manufacturing contracted for a fifth straight month. Additionally, China had banned major stakeholders from selling large chunks of their shares. The six-month lockup period on share sales by major institutional investors is expected to be lifted next week. Shares worth 1.24 trillion yuan might be freed up next Monday, which could further impact the stock prices.

Jittery investors are worried that next week’s market would open with an equally gloomy outlook, if not more. Moreover, they fear that tomorrow’s market could be a mirror image of today’s incident, as the sell-off might have intensified because of the implementation of the circuit breaker.

The influence of China’s stock trading on global markets has increased after the nation’s $5 trillion equity market took a nasty fall. The Shanghai gauge had plummeted by more than 40 percent from mid-June through its August low. This unfortunate event severely impacted investor confidence in the world’s second-largest economy.

The newly devised circuit breakers that fortunately worked well on China’s stock trading were finalized barely a month ago. Interestingly, it is not the large institutions but the individual investors in China who influence more than 80 percent of trading, and it is these small investors who are being held responsible for jumping the gun and triggering the halt of trading.

[Photo by ChinaFotoPress/Getty Images]