China puts circuit breakers to keep tabs on volatility

Alerted by massive market volatility, Chinese government has decided to apply 'circuit breakers' to curtail further losses in the volatile markets. The draft regulation on circuit breakers seeks to suspend trading for 30 minutes on stocks that fell five percent. This is for individual stocks. For the index, in case it goes up or down by seven percent, then the trading will be suspended for the day. 

The proposed circuit breakers will trigger on both the sides when stocks or index move up or down crossing the stipulated limits. 

Chinese financial markets already suffered 40 percent losses since June. Stocks were trading with more volatility on Tuesday after the discouraging numbers about Chinese exports released. 

However, Shanghai Composite index rose unexpectedly in late trading (just last five minutes of trading) on Tuesday following the news that $11-bn (70 billion Yuan) railway project has been approved. 

Shanghai index rose 2.93 percent and closed at 3170.57 pints on Tuesday. Similarly, Hang Seng index of Hong Kong bourse also moved up 3.28 percent to finish at 675.52 points. Nikkei fell 2.43 percent to 17,427.08 points. 

National Development and Reform Commission (NDRC) has cleared two new infrastructure projects on Tuesday. This lifted the markets in last five minutes of trading on Shanghai Stock Exchange and Hong Kong Stock Exchange. Banking stocks started moving up from afternoon trading as the news spread in the market that government-backed investors entered in support of the market. 

Bank of China and China Construction Bank shares moved up marginally.

Coming to circuit breakers system, the proposed new mechanism will be linked to CSI300 index, which acts as benchmark for applying limits on stocks movements.

CSI300 index tracks large-cap listed companies on Shanghai and Shenzhen. Based on CSI300 index movements, if a stock moves over five percent up or down from the previous close of index, it'll attract circuit breaker. Similarly, seven percent up or downward movement of CSI300 index will result in stopping of trading for the day. 

Futures in stocks and index are allowed to fluctuate in the range of 10 percent in either direction. 
This apart, the customs data indicate that the world's second largest economy's exports for August fell 6.1 percent and import by 14.3 percent. Imports dropped 14.6 percent during the first eight months of this year and exports eased 1.6 percent. 

According to a statement from Shanghai Stock Exchange, the circuit breakers are required for suppressing excessive trading to control volatility. Wide range of share price movements will lead to panic situation among small investors.