Stock market in china crashes
Update, January 7th, 3. China's stock exchanges announced on Thursday evening that they would suspend use of the circuit-breakers. The securities regulator said they were not the main cause of the market's fall but had not achieved their aim and had instead caused a 'magnet effect', as described in the article below.
BIG swings in the Chinese stockmarket are par for the course.
U.S. Stock Market Data - Dow Jones, Nasdaq, S&P - CNNMoney
But even by its wild standards, the alacrity of its latest crash was stunning. When the action resumed, it lasted all of one minute before the second and final circuit-breaker was hit: Why else would investors be in such a rush to dump their shares? Growth is certainly slowing, but the problem with this view is that the Chinese stockmarket has only ever had a tenuous relationship with reality.
It is often derided as a casino.
Wu Jinglian, a veteran economist, has quipped that this is unfair to casinos. In China's stockmarket, the rules rarely apply to big investors, who treat price manipulation as a basic trading strategy. But while the swings of the Chinese market defy explanations most of the time, there is actually extensive research to help explain the dynamics of the latest crash.
For the culprit, look no further than the circuit-breakers that regulators introduced at the start of this week. Only four days into operation, they have already been triggered in much the same manner twice: The theory of circuit-breakers is that they are supposed to help calm an over-excited market.
For analysts who have studied circuit-breakers, this should not be surprising. They generally fall into two camps: But even the former acknowledge that circuit-breakers pose the risks described by the latter.
–16 Chinese stock market turbulence - Wikipedia
The general view is thus that that they should only be applied in extreme cases. Circuit-breakers were meant, from their inception, to be triggered only in truly extraordinary circumstances—ie, a severe market decline when the prices have dropped so dramatically that liquidity and credit dry up, and when prices threaten to cascade in a panic-driven spiral.
As long as the markets are closed or have the potential to close early, there is uncertainty. Uncertainty for individual investors leads to confusion. In China, big swings between the open and close of the stockmarket used to be the norm, much to the chagrin of reporters who were expected to divine something intelligible from the movements.
Peter Thal Larsen of Reuters Breakingviews put it best in a tweet: The introduction of circuit-breakers has changed this logic. Traders rush to sell before they are locked out. In its design of the circuit-breakers, China has violated one of the basic principles of those countries that also apply them: Now, though, the circuit-breaker makes those lurches permanent, until the next trading day begins.
None of this means that the Chinese stockmarket should be performing well. Share prices, especially for small-cap stocks, are still extremely frothy. But the madness of minute-long trading days was utterly avoidable.
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