China’s major stock exchanges looked set to extend losses after shares plunged on the first trading day of the year, triggering a “circuit breaker” that suspended equities trade nationwide for the first time and put months of regulatory reforms at risk.
The sell-off saw the CSI300 index of the largest listed companies in Shanghai and Shenzhen plunge 7.0 percent before trading was suspended, its worst single-day performance since late August, the depth of a summer stock market rout.
And more weakness may be in the cards on Tuesday if the behaviour of a U.S. exchange-traded fund tracking mainland China shares is a guide. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF slumped nearly 10 percent in intraday U.S. trading, hitting its lowest since October 2014, before ending the session down 8.5 percent.
Shares of several Chinese companies that trade primarily in U.S. markets, and are not subject to the same trading limitations, slumped as well, though not by the same magnitude. Alibaba Group Holdings Ltd shed 5.6 percent and Baidu Inc fell by 2.7 percent. The Bank of New York Mellon China ADR Index lost 4.0 percent.
The collapse, which followed the release of weak economic data on Monday, raises fresh doubts about regulators’ capacity to wind back heavy trading restrictions implemented in the wake of a massive summer stock market crash in which major indexes lost as much as 40 percent before top leadership intervened.
In fact, many analysts attributed the decline to the imminent end of a six-month lockup period on share sales by major institutional investors, a policy implemented to shore up indexes in the wake of the crash.
“The slump apparently triggered intensified selling, while the trigger of the circuit breaker seems to have heightened panic, as liquidity was suddenly gone and this is something no one has experienced before. It was a stampede,” said Gu Yongtao, strategist at Cinda Securities.
Haitong Securities analysts had earlier estimated that up to 1.24 trillion yuan worth of shares would be freed up for sale by next Monday, assuming the lockup period is not extended.
The collapse in Chinese shares sent ripples across global financial markets, causing other stock markets to reel and stoking demand for safe-haven assets such as government bonds. The Dow Jones industrial average ended down 1.57 percent, its worse start to a year since 2008, while the Nasdaq Composite dropped 2.08 percent.
China’s response to the summer market crash was seen by many inside the industry as heavy handed, as it included suppression of futures and derivatives markets and instilled an atmosphere of fear at brokerages as regulators pulled in executives for questioning about insider trading and “malicious short-selling.”
While that stabilised indexes, it also suppressed volumes and poured cold water on foreign investors, who began moving out of Chinese shares.
However, authorities recently showed signs they believed indexes had stabilised, in particular by allowing initial public offerings (IPOs) to resume in November, a vote of confidence given it was a flood of IPOs that was blamed for setting off the crash in the first place.
The circuit breaker mechanism, which halts trade for 15 minutes if the CSI300 index falls or rises 5 percent in a day, then suspends trade for the day if it continues to fall or rise to 7 percent, is a new measure that came into effect Monday and was put to test immediately.
Chinese individual shares had already been subject to a 10 percent intraday trading range.
However, Monday’s performance caused some analysts to doubt the efficacy of the new measure.
“To me, this is all part of the growing pains of China trying to liberalize its financial markets to become an important player on the world stage, and from a technicality standpoint, they are learning to deal with the various issues that come with that,” said Howard Tai, an analyst at Aite Group.
Given that China’s market is very momentum driven, the 5 percent and 7 percent trading curbs need to be widened, he said.
The circuit breaker may have actually “deepened investor panic, and limited trading,” while those betting against the market may have been emboldened, as they did not have to worry about a late session rebound, said David Dai, Shanghai-based investor director at Nanhai Fund Management Co.
Market reforms put on hold by the crash could be delayed further if the circuit breaker fails to halt selling pressure and markets – which had recovered more than 25 percent from the pit of the crash prior to Monday’s correction – head lower again.
A sell-off could pressure stock regulators to refreeze IPOs to preserve liquidity, to extend the share lockup to prevent more selling, and keep the “national team” of brokerages and fund management firms on the hook to keep buying and holding stocks at a loss.
It could also further dent confidence in the China Securities Regulatory Commission (CSRC) and of the wider financial regulatory framework to manage increasingly complex markets even as China’s economy struggles against major headwinds.
Another retreat would likely bolster the case for the creation of a “super regulator” that would step to manage the CSRC and other related regulators to improve coordination.