Markets

China securities regulator: Circuit breaker protected investors, calmed market

CNBC with Reuters
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China's securities watchdog, the China Securities Regulatory Commission (CSRC), has defended its use of a new circuit breaker on the countries' volatile stock exchanges on Monday, saying that the mechanism protected investors and calmed markets.

The regulator did say, however, that the circuit breaker needed improvement.

"The circuit breaker is an entirely new mechanism and there's no experience (with such things) in China. The market needs some time to gradually adapt to the new rules," the CSRC said, according to Reuters.

The circuit breaker kicks in when the CSI 300 - an index that comprises the biggest stocks on the Shanghai and Shenzhen Composites - declines 5 percent, triggering a 15-minute trading halt. A further drop to 7 percent on the CSI 300 causes trading to halt on all mainland indexes.

Conceived last September after months of market volatility, the circuit breakers were used for the first time on Monday, the first day of trading of the Western new year, causing a knock-on panic in European and U.S. markets that sent the Dow Jones Industrial Average to its worst annual open in eight years.

On Tuesday, Shanghai opened more than 3 percent lower before quickly recovering.

The CSRC noted that the circuit breaker helped protect stockholders from bigger losses and tempered nerves.

This was at odds with the views of most market commentators, who blamed the circuit breaker for exacerbating panic selling by retail shareholders.

Charles Blankley, chief investment officer at Gemmer Asset Management, told CNBC he did not believe circuit breakers were effective in markets such as China's.

"It's a retail-driven market, people chase momentum so when investors are told they can't sell, the selling is just stalled until the circuit breakers come off," he said.

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Also on Tuesday, Reuters reported that the CSRC had said that it was considering rules to regulate share sales by big investors and senior executives at listed companies.

And the Chinese Sina website reported that the Shenzhen Stock Exchange was telling big shareholders to hold on to their stakes, even after a lockup lifts on January 8, as the exchange waits for more information from authorities on a sales ban implemented in July on large investors. Sina cited sources, noting that the information was not currently available on the Shenzhen exchange's website.

This move appears to address concerns that Monday's rout was sparked in part by the impending end of a six-month lockup on share sales by investors with holdings of 5 percent or more in a company. The lockup was due to be lifted on Friday and was expected to result in a mass exit from equities by big investors.

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