Well that didn’t last long!
China has suspended new stock market rules after only four days because they were fueling sharp trading losses — rather than taming them.
The so-called circuit breakers were introduced this week in the wake of last year’s wild market swings. They were supposed to act as a kind of emergency brake but had the opposite effect.
The rules shut down China’s main markets twice this week, on Monday and again on Thursday, after shares plunged by 7% on both days.
Regulators said the mechanism wasn’t the main factor in the market rout, but admitted it had contributed to the selling.
China was hoping the introduction of circuit breakers would help prevent a repeat of last summer’s market crash.
The idea was that a 5% rise or fall on the main Chinese share index would trigger a 15 minute trading halt. A move of 7% at any time, or 5% in the last 15 minutes before markets close, would stop trading for the rest of the day.
Circuit breakers are commonly used on major markets in the U.S. and elsewhere. They’re designed to provide a timeout, giving investors a chance to calm down.
But they seemed to have had the opposite effect in China.
Analysts said the first suspension is triggered too quickly, and China’s army of small investors use the cooling off period to line up additional sell orders.
“The efficacy of the circuit breaker is questionable in a highly volatile environment driven by a herd mentality,” noted Kamel Mellahi of Warwick Business School.:
The rules will be suspended from the start of trading on Friday. Chinese regulators first announced the news on China’s social network Weibo.