Circuit breaker kicks in after Shanghai’s 6.9% plunge
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Asian markets tumbled Monday on the first day of trading in 2016, with declines so steep in mainland China that authorities halted trading there for the rest of the day.
Analysts cited a number of reasons for the selling, including China’s disappointing manufacturing data, reported earlier Monday, and the coming removal of a ban on major shareholders from selling stakes, put in place during the summer stock crash.
The Shanghai Composite Index SHCOMP, -6.86% fell 6.9%, its biggest decline on record for the first trading day of the year, before trading was halted. The smaller Shenzhen Composite 399106, -8.22% fell 8.2%.
The slide in Chinese stocks and the yuan’s accelerated depreciation drove markets elsewhere in the region deep into the red.
Japan’s Nikkei Stock Average NIK, -3.06% was down 3.1%, Hong Kong’s Hang Seng Index HSI, -2.68% fell 2.7% and South Korea’s Kospi SEU, -2.17% lost 2.2%.
Australia’s S&P/ASX 200 XJO, -0.48% fell 0.5%, with losses offset by gains in oil.
On its launch day, a new circuit-breaker system for Chinese stocks kicked in after steep declines on a benchmark of blue-chip shares. Chinese officials announced plans for the system in December, as a measure to prevent the wild swings that accelerated this summer’s stock-market crash.
But analysts and investors say the circuit breaker could trigger more selling, as the freeze spooks investors and losses snowball, setting off the halt all over again.
Chinese Markets Slammed Shut After Stocks Tumble
Asian markets tumbled on the first day of trading in 2016, with declines so steep in China that authorities halted all mainland trading before the end of the day. Photo: EPA
Investors may push for redemptions after Monday’s losses, said François Perrin, a portfolio manager at East Capital, a Stokholm-based asset manager which manages €2.1 billion ($2.3 billion). Losses could deepen still further on Tuesday, he added.
“The circuit breaker system actually creates a downward spiral” as more investors get nervous about trying to get out before others, said Hao Hong, managing director at Bank of Communications Co. “Having this so-called system in place is actually making the selling worse.”
The first trading halt on China’s mainland stock exchanges came shortly before 1:15 p.m., when the CSI 300 000300, -7.02% , a benchmark of the largest 300 stocks listed in Shanghai and Shenzhen, fell 5%, triggering a 15-minute halt under the new rules. A further slide to 7% triggered a second halt under the new system, this time for the remainder of the day.
When authorities announced the new circuit breaker in December, they said it to help the market “cool off in order to prevent the spread of panic sentiment, which may exacerbate volatility.”
Monday marked a fresh round of volatility for Chinese markets, which have rebounded by more than 20% from their lows of the summer, when heavy selling triggered volatility around the globe. Over 1,200 stocks on the Shanghai and Shenzhen market fell by the 10% daily downward limit, according to Wind Information.
A big difference this time around is lower leverage, or the use of borrowed money to buy stocks. In the summer months, local investors borrowed money from Chinese brokerages, which drove shares sharply up through June — and down in the weeks thereafter, as investors sold stakes to repay their brokers. Since then, official margin loans in China’s mainland market have fallen to less than 1.9 trillion yuan ($292.6 billion) from a peak of 2.3 trillion yuan in June. Authorities have also clamped down aggressively on loans from China’s unofficial shadow banks.
Losses started to build across the region after a private reading of factory-floor conditions showed activity contracted for the 10th-straight month in December, the latest signal that China’s economy is stalling.
The Caixin China manufacturing purchasing managers index fell to 48.2 in December from 48.6 the previous month. A figure under 50 indicates contraction.
Worries about selling pressure from large Chinese shareholders are building ahead of Friday, when a six-month selling ban put in place by authorities in the summer expires. The ban, which came into effect on July 8, was part of a series of measures to arrest a downward spiral in shares at the time.
The magnitude of the yuan’s move Monday caught investors off-guard. China’s central bank guided the currency weaker, setting the daily fix for the onshore yuan at 6.5032 on Monday, its weakest level since 2011, compared with 6.4936 on Dec. 31. The currency can trade 2% above or below the fix.
“Psychologically [today] was a big move — going through 6.50,” said Mitul Kotecha, head of rates and foreign-exchange strategy at Barclays in Singapore. “There’s been a lot of surprise in the market that China hasn’t slowed this decline [in the yuan] or come in more aggressively.”
The offshore and onshore yuan traded at their weakest levels since April 2011, with the onshore yuan as weak as 6.5318 to one U.S. dollar in late trade Monday. The offshore yuan was down as much as 0.97% against the U.S. dollar. Traders cited hedge funds aggressively buying U.S. dollars, pushing the yuan weaker.
Meanwhile, the yuan’s trading hours are set to be extended Monday, and investors say there could now be further losses.
Benchmark yields, which move inversely to prices, on five-year and 10-year Chinese government bonds rose after hitting multiyear lows in 2015.
Currencies in Asia slid across the board against the U.S. dollar, with South Korea’s won down 1.18%, the Malaysian ringgit down 1.2% and the Taiwanese dollar down 0.9%, as fears that the Chinese yuan’s accelerating slide would drag down these economies.
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