SUSPENDED: People walk along a pedestrian bridge with a screen showing stock market movements in Shanghai on Thursday. Trade was stopped in morning trade following a 7% plunge. Picture: AFP PHOTO
SUSPENDED: People walk along a pedestrian bridge with a screen showing stock market movements in Shanghai on Thursday. Trade was stopped in morning trade following a 7% plunge. Picture: AFP PHOTO

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 were at a loss to explain why.

One manager of $46m in Shanghai liquidated all his holdings. Other investors, including a top-performing hedge fund, tried in vain to cash out as circuit breakers ended trading abruptly.

By 9.59am local time it was all over — except that it was not. Next came a torrent of calls from clients angered by the carnage in a week that has seen two abbreviated trading sessions and a 12% tumble in the CSI 300 index.

"We are dealing with a flood of angry phone calls from clients complaining about the market plunge and the circuit breaker," says Huaxi Securities analyst Wei Wei in Shanghai.

He is "at a loss … as we didn’t quite figure out what was going on in the market".

There is 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 is 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 been has known for some time. The yuan is actually holding up well versus just about everything but the dollar, and analysts are predicting 6.5% economic growth this year.

What does seem to worry investors is how deftly, or ineptly, Chinese authorities will manage a stock market that has 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.

Criticism is intensifying over marketwide circuit breakers, launched at the start of this year, that kick in when there is a 5% 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%, as it did on Monday and on 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," says Gerry Alfonso, a trader at Shenwan Hongyuan Group 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."

Confusion reigns over how policy makers will react to the selloff. Obvious signs of intervention were absent on Thursday, even after share purchases by state-controlled funds on Tuesday helped the CSI 300 eke out a 0.3% gain.

While people familiar with the matter say the securities regulator held an unscheduled meeting on the market, it ended without a decision on policy action. Officials unveiled plans to curb share sales by stockholders a day before a ban was due to expire.

Some investors had no choice but to sell on Thursday. Chen Gang, who helps oversee the equivalent of$46m as the chief investment officer at Shanghai Heqi Tongyi Asset Management, dumped his firm’s equity holdings.

Mr Chen says he will not 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," Mr Chen said on Thursday. "We were forced to liquidate all our holdings this morning."

Kelvin Tay, regional chief investment officer at UBS Group’s wealth management business in Singapore, sees "an opportunity to pick up stocks that are undervalued".

Some other managers could not sell fast enough. Jiao Ji, whose hedge funds averaged a 61% return during the $5-trillion summer rout after he sold out before the crash, says the trading halts came so quickly that he did not have time to unload his holdings this time.

Bloomberg