SHANGHAI: Volatility shook Chinese stock markets on Tuesday, as the Shanghai index dropped more than 3 percent on concerns over regulatory uncertainty and slowing growth before recovering, a day after authorities halted trading to arrest falling prices.
The Shanghai market slumped 6.86 percent on Monday after the release of weak manufacturing data heightened worries about the health of the world’s second-largest economy, sparking a wave of selling of global equities.
A new “circuit breaker” mechanism aimed at curbing sharp swings went into effect, closing markets early, but analysts said its introduction added to traders’ nervousness, prompting them to sell rather than risk being caught with holdings they could not dispose of.
“The main reason for yesterday’s fall was concern that China’s economy won’t steadily pick up. The circuit breaker was more of an accelerant for the fall,” Northeast Securities analyst Shen Zhengyang told Agence France-Presse.
“Today’s [Tuesday’s] low should be the lowest point for the short term.”
By the break on Tuesday, the benchmark Shanghai Composite Index was up 0.41 percent, or 13.66 points, at 3,309.92 after falling as low as 3.18 percent in morning trade.
The Shenzhen Composite Index, which tracks stocks on China’s second exchange, was down 0.53 percent, or 11.23 points, at 2,107.93, gaining back most lost ground after
slipping 5.03 percent at one point.
Hong Kong’s benchmark Hang Seng Index dipped 3.64 points to 21,323.48 by lunch—
having swung in and out of positive territory through the morning.
The market watchdog, the China Securities Regulatory Commission (CSRC), sought to calm the panic by defending the circuit breaker.
Under the system, a 5-percent drop in the CSI300 index, which covers both bourses, triggers an automatic 15-minute trading halt. A fall of 7 percent closes the exchanges for the rest of the day.
“The circuit breaker has a big impact in stabilizing the market and its main function is to provide a ‘cooling off period’ for the market to avoid or reduce rushed decisions made during wide swings,” it said in a statement on its verified microblog.
Soothing the market
The CSRC also addressed Friday’s looming expiry of a ban on share sales by owners of more than 5 percent of a company—introduced in July to help defend prices against a market rout.
The watchdog announced it was formulating regulations on major shareholders’ selling, but said the rules will be announced “soon,” leaving open whether the ban will be lifted in line with the original deadline.
“The CSRC’s explanation about the share reduction rules helped soothe the market,” Qian Qimin, an analyst at brokerage Shenwan Hongyuan, told Agence France-Presse.
But investors are still worried about the state of China’s economy, a major engine of global growth. Volatility in Chinese stocks slammed international financial markets last year.
The Shanghai index rose 150 percent in the 12 months to mid-June and then crashed nearly 30 percent in three weeks, before ending the year up 9.4 percent.
China logged its worst economic performance since the global financial crisis in the third quarter, with gross domestic product (GDP) rising just 6.9 percent—its lowest level in six years.
The government is due to release gross domestic product data for the fourth quarter and all of 2015 on January 19. China’s GDP grew 7.3 percent in 2014, the slowest pace in almost a quarter of a century.
UBS Securities Asia said on Tuesday that a worst case scenario could see China’s growth slide to just 4.0 percent, though it added that was “extremely unlikely.” It is forecasting annual growth of 6.2 percent for 2016 and 5.8 percent in 2017.
“Even a sharp China slowdown will not create a global recession,” Wang Tao, head of China economic research at UBS, said in a research report.
“As developing economies like China have become a large contributor to global growth, they are more impacted from trouble in the developed world than vice versa.”