China suspends stock circuit breaker rule

The Shenzhen and Shanghai stock exchanges will suspend the new stock circuit breaker rule that came into place this week as of Friday.

“To maintain the smooth operation of the stock market, as approved by the China Securities Regulatory Commission, the Shanghai Stock Exchange has decided to suspend the circuit-breaker mechanism,” the Shanghai bourse said in a statement.

The new circuit breakers, which kicked in on Monday, have been criticised by analysts for exaggerating declines as investors rush to exit positions before getting locked in by the halts.

Market participants said the move was good news as it removed the element of fear from trading.

“At last, some positive news out of China. The authorities seem to be learning the lesson that it’s better to let the markets do their thing rather than micro-manage,” said SpreadCo analyst David Morrison.

“Trading halts can actually exacerbate downside moves as would-be buyers are unable to come in and buy beaten-up stock. Rather, the halts add to panic as investors line up to sell to avoid being repeatedly locked out of the market. There can be little doubt that a 7% circuit-breaker was too tight for the volatile Chinese markets. However, it’s unlikely that this will magically calm them, but at least we’ll find out where the bottom is sooner.”

The circuit breaker mechanism was triggered twice this week, first on Monday and earlier on Thursday, after the CSI 300 index fell more than 7%.

Under the mechanism, a 5% move in either direction from the CSI 300 index’s previous close sparks a 15-minute trade suspension across China’s stock indexes if it occurs before 1445 local time.

A 5% move after that prompts a trade suspension until the market closes, while moves of 7% lead to a halt for the rest of the day.