News Analysis: Chinese stock index circuit breaker in pipeline to encourage long-term, value investing

A circuit breaker mechanism is expected to be introduced in China's stock market soon after regulators consider public opinions gathered over the past two weeks.

From Sept. 7 to Sept. 21, China's Shanghai and Shenzhen stock bourses and the exchange for trading financial futures had been gathering public opinions on introduction of an index circuit breaker system, which would suspend trading temporarily in response to substantial rises or drops.

The system would follow changes in the Hushen 300 Index, which reflects the performance of China's Shanghai and Shenzhen stock exchanges. When the index rises or falls by 5 percent, the circuit breaker would be triggered with a 30-minute suspension in stock trading.

If the index changes by 5 percent after 2:30 p.m., or if the index rises or falls by 7 percent, trading would be suspended until 3 p.m., the closing time for daily trading, according to the draft.

"The circuit breaker mechanism will help curb wild stock market fluctuations and promote slow yet steady rallies," said Lu Qiang, chief researcher of the assets equity department with Genial Flow Asset Management.

The circuit breaker mechanism is in the pipeline and will soon be in place after discussions among regulators, a step further in their battle against major swings in the stock market, according to insiders.

The Ministry of Finance scrapped a dividend tax for Chinese investors holding a stock for more than one year earlier this month to promote long-term investment following a stock market rout since mid-June.

China's stock market gyration beginning two months ago saw Shanghai and Shenzhen stocks tumble more than five percent at times. At one point, nearly all gains since the beginning of this year were wiped out.

The country's securities regulator stressed that it would stand by its recent market-stabilizing rules last Friday.

Starting July 8, the government banned major shareholders, corporate executives and directors who hold more than 5 percent of a company's shares from selling stakes in listed companies for six months.

Unlike stock markets in the United States and Europe, China's is dominated by retail investors, who account for nearly 80 percent of trade. Investment decisions are often speculative rather than based on business and economic fundamentals.

China's A-share markets are still young with easy exposure to short-term volatility, but would grow mature with more and more institutional investors such as large insurance companies to stake in, Alan Yarrow, Lord Mayor of the City of London, said while attending a forum on internationalization of the yuan in Shenzhen on Monday.

To encourage rational investing, authorities have long tried to introduce more institutional investors into the A-share markets. It has recently allowed pension funds to invest up to 30 percent of their assets in equities and has expanded foreign institutional investors' access to the A-share markets.

"A string of policies to improve the stock market system will help reduce market volatility and encourage long-term, value investing, beefing up the bullish outlook for China's A-share markets, " Lu said. Endi