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January 5, 2016

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Share trade halts after 7% plunge

CHINA stocks plunged on the first trading day of 2016, triggering a circuit breaker mechanism that forced markets to close early for the first time.

Dismal factory data and further weakening for the yuan added to economic concerns at the beginning of a week when a ban on share sales by major stakeholders is likely to be lifted.

Trading in stocks, index futures and other equity-linked securities closed at 1:33pm yesterday after the CSI 300 index, which tracks the share prices of the 300 largest companies listed in Shanghai and Shenzhen, fell by 7 percent. An earlier 15-minute suspension from 1:12pm had failed to stem the decline.

The benchmark Shanghai Composite Index ended down 6.9 percent, while the Shenzhen Component Index tumbled more than 8 percent.

“We have not seen such volatility on the first trading day for the past 11 years,” said Hong Hao, chief strategist at Bocom International. “The trading halt obviously has worked against regulators’ will.”

The circuit breaker mechanism that came into effect yesterday is part of the securities regulator’s effort to stabilize markets by providing a cooling-off period for investors during periods of drastic market fluctuations.

Under the rules, a move of 5 percent in the CSI 300 triggers a 15-minute trading halt, while a move of 7 percent halts trading for the rest of the day.

“The plan was to suppress market volatility, but it has magnified volatility as investors were concerned that such significant selling pressure would beget more selling,” Hong said.

Guo Feng, an analyst with Northeast Securities, said there were worries about what would happen later this week when the ban on share sales by major stakeholders ended.

“The market was dragged down by worries that major shareholders will sell shares as soon as the ban is lifted,” Guo said.

On July 8, the China Securities Regulatory Commission announced that investors with holdings of more than 5 percent, along with corporate executives and directors, would be barred from selling stakes for six months.

Market sentiment was also depressed by disappointing data that showed China’s manufacturing activity had shrunk for the 10th consecutive month in December. The latest Caixin General China Manufacturing Purchasing Managers’ Index fell to 48.2 last month, down from a five-month high of 48.6 in November.

Meanwhile, the People’s Bank of China cut the yuan’s value against the US dollar to its weakest in more than four and a half years, intensifying fears of capital outflows.

“Data showed capital has been flowing out of China’s stock market for nine straight weeks,” Shenwan Hongyuan Securities said in a note. “As the US enters an interest rate hike circle and China’s economic growth remains weak, capital outflows are expected to continue for a while.”

The jitters extended to Europe and were expected to push US markets lower upon their open. The DAX index in Germany, whose export-led economy is sensitive to China’s fortunes, tumbled 4.2 percent to 10,288.22. Britain’s FTSE 100 fell 2.4 percent to 6,090.76 while France’s CAC 40 dropped 2.7 percent to 4,514.03. Dow futures were down 1.7 percent, while S&P 500 futures shed 1.8 percent, The Associated Press reported.

Chinese authorities have been trying for months to restore confidence in stocks after a plunge in June rattled global markets and prompted a multibillion-dollar government intervention. They are gradually unwinding emergency controls that included a freeze on new stock offerings.


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