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 The selloff saw the CSI300 index of the largest listed companies in
Shanghai and Shenzhen lose 7.0 percent before trading was suspended,
its worst single-day performance since late August 2015, the depth
of a summer stock market rout.
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 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 6-month lockup period on share sales by major institutional
investors, a policy implemented to shore up indexes in the wake of
the crash.
"This is quite unexpected," said Gu Yongtao, strategist at Cinda
Securities.
"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."
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.
CONFIDENCE DASHED
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 stabilized 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
stabilized, 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.
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"Without the circuit breaker mechanism, the market wouldn't have
dropped so much," said David Dai, Shanghai-based investor director
at Nanhai Fund Management Co.
"The mechanism deepened investor panic, and limited trading."
Dai added that the circuit breaker would actually embolden market
bears, as they don't have to worry about a late-session rebound.
"This mechanism should be scrapped, or at least modified."
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 selloff could pressure stock regulators to re-freeze 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.
(This story has been refiled to add dropped word "prior" in the
fourth to last paragraph)
(Reporting by the Shanghai Newsroom; Editing by Sam Holmes)
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