On the fourth trading day after issuance of circuit breaker mechanism, trading in the A-share market only lasted for 15 min, and then suspended to the closing. China Securities Regulatory Commission (CSRC) indicated in the evening of yesterday that circuit breaker mechanism will suspend for the stock index from Jan. 8. Institutions all pointed out that this exceeds their expectation, as they had previously predicted that the regulator would cancel the threshold value of 7 percent but keeping 5 percent.
Two main factors cause market crash
Just as CSRC spokesman said, institutions commonly believed that circuit breaker mechanism is not the main factor to cause the market crash. Ren Zeping, best macro analyst of Panorama Network Co., Ltd, recently wrote that A-share plummet on Jan. 4 was a normal adjustment triggered by changed expectation on fundamentals and capital factor, circuit breaker mechanism might cause panic sentiment and restrict liquidity, but it was not an essential factor.
Ren further explained that A-share money-making effect has weakened since latter November of last year without new favorable catalyst, and the market itself has a demand for internal adjustment. It is more important that new pressures stress on the market to make it go down.
These new pressures include: 1) chip supply pressure: under fund stock combat, the market becomes more concerned about unlocking non-tradable stocks on Jan. 8, and worries on market expansion, such as registration-based IPO system and strategic emerging broad, have not been eased totally; 2) concern on capital outflow and going-down risk preference caused by depreciated exchange rate: the U.S. and China are not in the same period of economy and monetary policy, and China’s monetary authority has adopted periodical depreciation policy to release the pressure, which is easy to form a depreciatory expectation in the market that “depreciation hasn’t touched the bottom yet”.
Deng Haiqing, chief global economist of JZ Securities, also indicated that panic sentiment, triggered by sympathetic vibration of policies on exchange rate, insurance supervision and shareholding-decrease, caused a market crash after the New Year Day.
Detailed factors mentioned by Deng cover five aspects: 1) China Insurance Regulatory Commission previously warned the risk to buy shares of listed companies through the secondary market acquisition to 5 percent limit; 2) RMB has continuously and greatly depreciated; 3) although CSRC made announcement to ease panic sentiment, the market concern still exists, as ban forbidding decrease in shareholdings expires; 4) greatly-increased supply aroused by registration-based IPO system triggers the market concern; 5) the market previously expected that the central bank would like to over ease the policy, but it disconfirmed.
A general manager of a capital management company under a Shanghai brokerage indicated that original intention of circuit breaker mechanism is good, and reasons causing market crash are complicated, which cannot be entirely attributed to circuit breaker mechanism.
Circuit breaker triggers anchoring effect
Relevant insider of China Merchants Securities Co., Ltd. (600999.SH) indicated that, when decline range was close to 2 to 3 percent, it rapidly reached 5 percent to trigger the circuit breaker for the first time, once it started to go down. When trading resumed, buying weakened and selling surged, which immediately triggered the circuit breaker for the second time. Based on the trends of this Monday and yesterday, investors’ learning effect is obvious, and drop rate is more rapid.
The said insider from China Merchants Securities believed that investors’ confidence has been weak since last market crash, and they are apprehending danger in every sound. Rapidly-spread brief news has impact on investors’ short-term sentiment, and the threshold values of 5percent and 7 percent in the circuit breaker mechanism trigger the anchoring effect on investors.
Lin Caiyi, chief economist of Guotai Junan Securities (601211.SH), believed that, based on trading process of Jan. 4, threshold values set for circuit breaker mechanism unintentionally provide a clear “loss-stopping” target for panic investors. It only took five minutes to touch the second-level threshold value of 7 percent. During the said five minutes, downtrend of the two bourses became worse with obvious trading turnover, which was clearly triggered by investors’ dump before touching 7 percent.
“Entire suspension” exceeds expectation
Before CSRC’s decision to entirely suspend the circuit breaker mechanism, the industry generally believed that cancelling the threshold value of 7 percent but keeping 5 percent would be the best result. Therefore, the industry is shocked by the CSRC’s decision yesterday.
A person in charge of capital management under a Shenzhen brokerage, who is not willing to disclose his name, mentioned that core of the circuit breaker mechanism is to make the investors calm down, leave time for them to consider, and reduce non-rational factors to stabilize the market. But retail investors account for larger proportion in the investor structure, and it is easier to cause panic sentiment and restrict liquidity when the market is not stable, which will force institutional investors to follow the sell-into-corrections of retail investors to deal with redemption. Therefore, it previously expected that regulator would cannel the rule related to 7 percent to protect the liquidity. But the CSRC’s decision to entirely suspend the circuit breaker mechanism indeed exceeds the industrial expectation, which is predicted to positively influence the market.
A person in charge of capital management under a Beijing brokerage also pointed out that threshold values of 5 percent and 7 percent are too close to each other, not providing time and space for each market player’s consideration and actual trading. Final decision of the regulator shows that its protection for the market exceeds expectation.
The field of private placement agrees with the CSRC’s decision. Hu Jiguang, chairman of Beijing CQ Capital Management Co., Ltd., indicated that, the market was nearly out of liquidity yesterday, as buying and selling were frozen. The following loss-stopping trend will bring huge risk to the market, if the circuit breaker mechanism does not suspend. The CSRC’s decision yesterday shows the government’s care and protection for the market, and also reflects that capital market plays an important role in national economy. It is believed that such decision benefits for rebuilding the market confidence. On the other side, it also shows that the regulator has already realized such severe problem.
Jelly
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