China's seven-minute selling frenzy that shook global markets

The sell orders piled up fast on Monday at Shenwan Hongyuan Group, China’s fifth-biggest brokerage by market value.

China’s CSI 300 Index had just tumbled 5 percent, triggering a 15-minute trading halt, and stock investors were scrambling to exit before getting locked in by a full-day suspension set to take effect at 7 percent.

When the first halt was lifted, the market reaction was swift: it took just seven minutes for losses to reach the limit as volumes surged to their highs of the day.

“Investors rushed to the door during the level-one stage of the circuit breaker as they fretted the market would go down further,” said William Wong, the head of sales trading at Shenwan Hongyuan in Hong Kong.

Spiraling declines on the first day of China’s circuit breakers show how measures meant to help restore calm to one of the world’s most volatile equity markets risk doing just the opposite.

The selloff could spur policy makers to “fine tune” the new rules, according to Andrew Sullivan, managing director for sales trading at Haitong International Securities Group Ltd. in Hong Kong.

Unlike similar circuit breakers in markets including the U.S., the threshold for trading halts in China is low enough that they would have kicked in 20 times last summer alone.

Circuit breakers are the latest effort by Chinese authorities to tame swings in a stock market where the growing use of leverage by individual investors drove an unprecedented boom -- followed by a $5 trillion bust -- in the span of just a few months last year.

The CSI 300 index of the nation’s biggest companies rose or fell by 5 percent 20 times from the start of June through early September, with daily moves exceeding 7 percent on half of those occasions.

Chinese shares began Monday with losses after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders at the end of this week.

The first halt was triggered at 1:13 p.m. local time as losses in the CSI 300 reached 5 percent.

Turnover surged after the suspension ended, peaking in the final minute before a 7 percent slump halted trading in shares, futures and options for the rest of the day.

Liquidity Concern

CRRC Corp., the nation’s biggest trainmaker, sank 2.8 percent in the last seven minutes, taking its drop for the day to 8.1 percent.

More than half of Agricultural Bank of China Ltd.’s 3.4 percent decline occurred between the two halts.

It was the worst-ever start to a year for the Chinese equity market, with the benchmark Shanghai Composite Index falling 6.9 percent.

"Investors feared that they wouldn’t be able to sell once the circuit breaker was turned on,’’ Luan Shaofei, a money manager at Changan Fund Management Co., said from Shanghai.

“This mechanism limits liquidity in the market and causes share prices to move up or down more quickly and easily.”

Unlike some measures to calm the $7.1 trillion equity market over the summer, Chinese authorities sought input from market participants when the circuit-breaker proposal was unveiled in September.

They even made some changes to the rules, including shortening the length of the first halt to 15 minutes from 30 minutes, before implementing them for the first time on Monday.

Traders said the halts took effect as anticipated without any major technical problems.

Investors need time to get used to the new mechanism, according to Zhang Gang, a strategist at Central China Securities Co.

“The circuit breaker intensifies selling pressure and panic sentiment as the index approaches thresholds because investors aren’t familiar with it,” Zhang said from Shanghai.

Such routs may eventually be seen by money managers as good buying opportunities, especially for large-cap companies, he said.

Calls to offices of China’s two stock exchanges weren’t immediately answered, while a query sent to a China Securities Regulatory Commission spokesperson via a WeChat message received no immediate reply.

Low Threshold

Policy makers proposed circuit breakers in the wake of a market crash that saddled many of the nation’s 99 million individual investors with losses.

The new mechanism adds to trading restrictions that include a 10 percent limit on daily swings for individual stocks and a so-called T+1 rule preventing investors from buying and selling the same shares in a single day.

While the U.S. also has circuit breakers to prevent excessive swings, the world’s largest stock market has a higher threshold for shutting down exchanges completely.

Trading is halted for 15 minutes for companies listed on the New York Stock Exchange and Nasdaq Stock Market when the Standard & Poor’s 500 Index drops 7 percent, and it would take a fall of 20 percent to end trading for the day.

Like China’s intervention to strengthen the yuan last year after a surprise devaluation roiled global markets, policy makers may take steps to prevent losses from snowballing, according to Steven Leung, an executive director for institutional sales at UOB Kay Hian (Hong Kong) Ltd.

"Obviously the CSRC doesn’t want to see what happened today, and they may do something" to prevent investor panic, Leung said.

"You never know what they will do when something goes wrong."