Richard Quest explains China's circuit breakers
Trading in Chinese stocks was suspended Thursday for a second day this week after a dramatic plunge that sent shocks through global markets.
Dealing was briefly halted after the CSI 300 stock index fell 5%. When markets re-opened, losses reached 7% within seconds, triggering a complete suspension for the day. The shortened trading session lasted just 30 minutes.
The abrupt decline triggered so-called circuit breakers, which Chinese authorities recently implemented in a bid to tame the country's volatile markets. The new circuit breakers were also used to halt trading early on Monday.
While circuit breakers initially limit losses, they may encourage investors to sell more. Why? Observers say the first breaker is reached too quickly, and investors use the cool-down period to line up additional sell orders.
The CSI 300, which tracks stocks in Shanghai and Shenzhen, has already fallen 12% in 2016.
China's central bank responded Thursday by announcing it would pump $10.6 billion into the financial system. That follows an injection of $20 billion on Tuesday.
The moves are designed to juice stocks and calm mainland markets, which are dominated by small savers who put more faith in speculative investing newsletters than company fundamentals. But observers say they also signal that China's leaders are concerned about the economy.
"Investors recognize that the [central bank's] actions serve as confirmation that China's economy is slowing in a meaningful fashion, which has real repercussions on global ... growth," Mike O'Rourke, chief market strategist at JonesTrading, wrote in a note.
Related: Check world market data
Two separate reports this week fanned fears of slower growth in the world's second-largest economy. One showed that China's services sector grew at the weakest pace in 17 months in December -- another revealed that activity had slowed in the country's key factory sector.
Another concern is China's weakening currency: Before trading began Thursday, China's central bank set the yuan's value at its weakest level since March 2011. A weaker currency can help Chinese exporters and support growth, but it can also push money out of the country and hurt asset values.
Worries over the currency have intensified since a surprise devaluation in August. At the time, Beijing said it was hoping to allow market forces more control over the yuan -- but the central bank has spent billions in recent months to prop up the currency. On Thursday, regulators set the yuan's daily trading limit sharply lower, the largest such decline since August.
The yuan has lost nearly 6% against the U.S. dollar since August.
Related: Investors should focus on China's economy, not stocks
Chinese markets had stabilized in the final months of 2015 after a summer crash caused trillions of dollars in losses.
Beijing reacted forcefully, spending at least $236 billion to stop the slide. The central bank cut interest rates, while regulators suspended new share listings and threatened to jail short sellers. In an effort to prop up the market, regulators organized the purchase of shares using cash supplied by the central bank.
Markets are now dealing with the hangover from Beijing's intervention. In particular, investors had been worried that brokers would unload huge amounts of stock on Friday, when a ban on selling by major shareholders expired.
On Thursday, regulators announced new rules that will sharply limit stock sales. Major shareholders will be able to unload only 1% of their holdings in any three month period, and they must disclose their plans 15 days in advance.
Some analysts argue that Beijing would be best served by resisting the temptation to intervene in markets. Mainland stocks are still expensive when compared to corporate profits, and while a sharp decline in equity prices would be painful, Beijing's efforts to prop up the market are only delaying the inevitable.
"People think this is a manipulated, distorted market," said Peter Lewis, the director of Peter Lewis Consulting. "It's a market that's not open ... there are all sorts of restrictions on selling, and foreign institutions will be very alarmed by this."
The pain extended beyond mainland China on Thursday. Hong Kong's Hang Seng dropped 3.1%, while Japan's Nikkei shed 2.3%. U.S. stock futures were sharply lower.
Concerns about China have also helped ravage oil prices -- a trend that in turn hurts global economies and further unsettles stocks. Oil is now trading below $33 a barrel.
Most investing professionals recently surveyed by CNNMoney listed China as the biggest risk to U.S. stocks. When Chinese markets were halted Monday, the move triggered a global selloff, including losses of roughly 2% in the U.S.
-- Jessie Jiang, Pamela Boykoff, Jonathan Stayton, Lex Haris and Matt Egan contributed to this report.
CNNMoney (New York) First published January 6, 2016: 9:22 PM ET
