The China Securities Regulatory Commission (CSRC) just announced they are suspending their new circuit-breaker system, which stopped trading today after the China markets were open only 29 minutes. The point at which the circuit breaker stops trading for the day, 7%, appears to be too low. In comparison, in the US, stocks would have to fall 20% for trading to be stopped for the day.
In China this morning the market opened down about 3%, and investors apparently rushed to get their sales in before the circuit breakers closed them out of the market. China clearly will need to let markets reach market-clearing prices before a real bottom can be established. Earlier today the CSRC did announce that it was imposing a new limit on the volume of shares major shareholders can sell. The ban on such sales was scheduled to come off tomorrow, January 8.
Adding downward pressure on China stocks is uncertainty about the future course of the Chinese currency, the yuan, which dropped to a five-year low today (January 7). China’s central bank is intervening to reduce volatility and moderate the currency’s weakening. This intervention is causing foreign exchange reserves to decline.
December’s reserve slide ended a year in which China registered its first-ever annual decline in its foreign exchange reserves. The absence of clarity with respect to the government’s objectives for the future course of the currency is contributing to global investor concerns.