Even by the rough-and-tumble standards of China’s stock market, it was a chaotic 29 minutes.
With share prices going into free fall almost as soon as local exchanges opened, market gurus at Huaxi Securities Co. were at a loss to explain why. One manager of $46 million in Shanghai liquidated all his holdings. Other investors, including a top-performing hedge fund, tried in vain to cash out as circuit breakers brought trading to an abrupt halt.
By 9:59 a.m. local time it was all over -- except that it wasn’t. Next came a torrent of calls from angry clients upset by the carnage in a week that’s seen two abbreviated trading sessions and a 12 percent tumble in the benchmark CSI 300 Index. And it’s only January 7th.
"We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit breaker," said Wei Wei, an analyst at Huaxi Securities in Shanghai. "We are also feeling at a loss and confused today as we didn’t quite figure out what was going on in the market."
There’s certainly an Alice-in-Wonderland quality to this week’s selloff, which has radiated across global equity markets and rattled investor confidence in the world’s second-largest economy. It’s not as if China’s growth story is over. True, the yuan is weakening and the economy is decelerating to its slowest annual pace since 1990, but that’s been known for some time. The currency is actually holding up well versus just about everything but the dollar, and analysts are predicting a 6.5 percent economic expansion this year.
What does seem to worry investors is how deftly, or ineptly, Chinese authorities will manage a stock market that’s gone from boom to bust and back again more times in the past 12 months than most major peers do over the course of a decade. After policy makers took extreme steps to prop up shares last summer, analysts are struggling to gauge how Beijing will react to a renewed bout of volatility that threatens to weigh on business and consumer confidence.
Officials moved to act on Thursday by suspending the new circuit-breaker system, bowing to intense criticism. The rules, launched at the start of this year, were designed to kick in when there’s a 5 percent swing in the CSI 300. That halts trading for 15 minutes, with exchanges shutting for the rest of the day if the index moves by 7 percent, as it did on Monday and Thursday.
In a market with some of the world’s highest volatility, circuit breakers throw up a new wild card that the nation’s 99 million individual investors are still getting used to.
"It is clearly adding some unintended consequences, such as people trying to sell before the break, which is actually accelerating the decline," said Gerry Alfonso, a trader at Shenwan Hongyuan Group Co. in Shanghai. "Investors need time to adapt to the new rules. This type of development in a retail-driven market is bound to be challenging."
The decision to suspend the circuit breaker came hours after CSRC officials held an emergency meeting to discuss conditions on the nation’s tumbling stock market, according to a person familiar with the discussions who asked not to be named because he wasn’t authorized to speak publicly. Officials unveiled plans to curb share sales by major stockholders just a day before an existing ban was due to expire.
Some investors had no choice but to sell on Thursday. Take Chen Gang, who helps oversee the equivalent of $46 million as the chief investment officer at Shanghai Heqi Tongyi Asset Management Co. Chen dumped his firm’s equity holdings and said he won’t get back into the market until regulators improve the circuit breaker system. Many private funds and hedge funds in China have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value.
“This is insane,” Chen said in an interview on Thursday. “We were forced to liquidate all our holdings this morning.”
Then again, Kelvin Tay, the regional chief investment officer at UBS Group AG’s wealth management business in Singapore, sees a buying opportunity. "This week has been a disaster" but "it’s fun in a perverse way," he said. "Investors need to separate the sound from the noise. This is an opportunity to pick up stocks that are undervalued."
Some other managers couldn’t sell fast enough. Jiao Ji, whose hedge funds averaged a 61 percent return during the $5 trillion summer rout after he sold out before the crash, said the trading halts came so quickly that he didn’t have time to unload his holdings this time.
“It was quite abrupt on Monday, and it’s even more abrupt today,” said Jiao, the chairman of Sunrise Investment, based in northeastern China’s Jilin province. “There’s not even a chance for a rebound.”