“Circuit breaker” important to stabilize market: regulator

The CSRC also said it would further improve the circuit breaker mechanism after some analysts blamed the tool for inadvertently fuelling the sell-off. While major indexes opened more than 2.5 percent lower, they quickly recovered into positive territory.

The circuit breaker kicks in when the CSI 300 – an index that comprises the biggest stocks on the Shanghai and Shenzhen Composites – declines 5 percent, triggering a 15-minute trading halt.

While the CSRC reiterated that circuit breakers play an important role in stabilising the market, Citigroup, Deutsche Bank and Nomura said the rules failed to restore calm on Monday as investors scrambled to exit positions before getting locked in by the halts.

Analysts said government-banked investment funds had put money into the market in an attempt to stem the slide in share prices. The more volatile Nasdaq-like ChiNext Price Index was 1.4 percent down. Additionally, the China Securities Regulatory Commission (CSRC) asked bourses verbally to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond Jan 8, the people said. Investors rushed to sell after the suspension ended, with turnover peaking in the final minute before a 7 percent slump froze trading in shares, futures and options for the rest of the day. Stocks fell more than 2% in early trade, prompting fears that exchanges were set for a second day of panic selling after a 7% dive on Monday set off a new “circuit breaker” mechanism, suspending trade nation-wide.

“Capital has been flowing out of China’s stock market for nine straight weeks”, Shanghai brokerage Shenwan Hongyuan said in a research note, adding that this would likely “continue for a while… as the USA enters an interest hike circle and China’s economic growth remains weak”. A further drop to 7 percent on the CSI 300 causes trading to halt on all mainland indexes.

“Clearly, the tight stops of 5 percent [and] 7 percent of China’s circuit breaker have a “magnet effect” as prices gravitate towards the breaker and prompt a stampede that drains market liquidity”, Bocom International Holdings Co (交銀國際控股) chief China strategist Hao Hong (洪灝) wrote in a report.

The moves suggest that policy makers, who took unprecedented measures to prop up stocks during a summer rout, are stepping in once again to end a selloff that erased US$590 billion ($840.2 billion) of value in the worst-ever start to a year for the Chinese market.

Nine new financial service standards: China published nine new financial service standards that will come into effect on June 1, the country’s central bank said in an online statement on Tuesday.

It was the first time China used the “circuit breaker” mechanism it announced late a year ago.