BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/01
The circuit breaker was introduced at the start of the year to halt share and derivatives trading in Shanghai and Shenzhen for 15 minutes whenever the CSI 300 index rises or falls more than 5 % during intraday trading. Trading is suspended for the rest of the day if the shift exceeds 7 %. The brake mechanism was introduced to promote healthy market development, but on Thursday the CSRC said it had not achieved the expected effect and rather amplified market volatility. Some observers have claimed that the threshold for the circuit breaker is just too low. Last summer alone, trading would have been suspended 20 times had the circuit breaker been in place. Indeed, the introduction of the circuit breaker may have added to market volatility; the threat of trading disruption forces investors to speed up their trades.
The market jitters this week were partly due to the expiration of a six-month ban on selling shares imposed on major shareholders after last summer’s market plunge. The CSRC announced yesterday that it would keep the sales ban partly in place and limit share sales of major shareholders to 1 % of a company’s shares. Media reports also claim that state financial firms have again been purchasing shares to prop up prices as they did last summer. Some observers have commented that December’s weak purchasing managers’ index (PMI) reading may have contributed to the collapse in share prices. On the other hand, nothing about the PMI reading was very surprising. Yet again, any real economy links to the share price meltdown are hard to identify.
Trends in mainland China’s main stock market indices
Source: Macrobond.