The introduction of circuit breakers that limits the fall in Chinese stocks appears to have been made with fortuitous timing.
On the first day of the circuit breakers introduction, Chinese stocks plunged by a staggering 7%.
The initial drop of 5% in share values on the CSI 300 index meant that under circuit breaker rules that a 15-minute halt of trading was enforced.
However, the action by administrators of the Shanghai and Shenzhen stock exchanges to halt the slide was a vain attempt to stem panic selling. As soon as the CSI 300 was once again opened to trading, Chinese stocks quickly dropped by another 2%. This lead to the more restrictive circuit breaker rule being applied that meant trading in Chinese equities was halted for the day.
The drop in Chinese share values was triggered by poor PMI data. On Friday, the China Federation of Logistics and Purchasing published data that continues to indicate a contraction with the latest Manufacturing PMI staying stubbornly staying below the 50.0 level with the actual published as 49.7.
This depressing news was added to this morning when Markit published its own influential Purchasing Managers Index.
The latest data for the Caixin Manufacturing PMI reported a drop to 48.2. The market had expected 48.9, whereas the prior release was 48.6.
The dramatic drop in Chinese equities has been halted for now by the action taken by the Chinese authorities. However, the sell-off continued in Hong Kong as investors looked to hedge themselves against the risk of further falls in the values of Chinese stocks.
The Hong Kong, Hang Seng index, traded over 4% lower on Monday and the risk is we may see further falls on this exchange as there are no comparable circuit breakers in place at the moment that limits the extent of price drops.
With the year starting in such a pessimistic manner, we now turn our attention to European and US stock exchanges to see if the gloomy news from China is the cause of a more serious global contagion.