2nd Ld-Writethru-China Exclusive: China's stock markets suspended as shares tumble 7 percent

Trading on China's stock markets was ended at 1:33 p.m. Monday after shares tumbled 7 percent, triggering the new "circuit breaker" mechanism on the first trading day of 2016.

The early end to trading on Shanghai and Shenzhen bourses, the first in the history of China's stock markets, coincided with the launch of the automatic circuit breaker, designed to contain wild swings in the markets.

The mechanism follows the Hushen 300 Index, which reflects the performance of both Shanghai and Shenzhen traded stocks.

When the Hushen 300 rises or falls by 5 percent, the circuit breaker imposes a 15-minute suspension of trading. If fluctuations hit the 7-percent mark, trading is terminated for the day.

At 1:12 p.m., trading was suspended for 15 minutes and, immediately on reopening at 1:33 p.m., the index fell a further 2 percent whereupon trading ceased. When trading closed, the Shanghai Composite Index was down 6.85 percent, the smaller Shenzhen index down 8.16 percent, and the ChiNext Index, China's NASDAQ-style board of growth enterprises, down 8.21 percent. The sub-index for financial heavyweights, which tracks 51 banks and insurers, dropped 8.3 percent, with 16 financial firms falling by the daily limit of 10 percent.

CITIC Securities, China's largest brokerage firm, lost 9.82 percent to 17.45 yuan per share. Bank of China fell 3.49 percent to 3.87 yuan. China Construction Bank lost 3.11 percent to 5.6 yuan. China Life, one of the world's biggest life insurers by market value, lost 7.21 percent.

Energy firms also lost. Sinopec, China's top refiner, tumbled 3.63 percent to close at 4.78 yuan per share. PetroChina, the largest oil and gas producer, lost 2.63 percent to 8.13 yuan.

The decline is generally being attributed to downbeat market sentiment stemming from weaker than expected manufacturing activity in December and a steep fall in the yuan exchange rate on the day.

The Caixin General China Manufacturing Purchasing Managers' Index (PMI),released today, edged down to 48.2 in December from 48.6 in November.

The reading is the 10th month in a row below the 50-point level which demarcates contraction and expansion.

December's PMI pointed to deteriorating operating conditions faced by Chinese goods producers, according to financial information service provider Markit and Caixin Media Co. Ltd. who publish the figures.

Adding to the woes, the central parity rate of China's currency, the yuan, weakened by 96 basis points to 6.5032 against the U.S. dollar on Monday, the lowest level since May 2011.

The decline may have triggered fears of a capital flight, said Deng Haiqing, economist at JZ Securities.

The market is also worried about the forthcoming anullment of a rule which restricts shareholders with holdings of more than five percent in a company in selling shares. The rule came into force in July to prevent free falls in the markets and expires on Friday, raising the possibility of a substantial sell-off.

In addition, about 9.27 billion lock-up shares in 34 companies, worth around 95 billion yuan, will become tradable this week.

SILVER LINING

The steep fall is eerily reminscent of the market plunge in 2015, which erased huge amounts of wealth, especially for small and new investors. The Shanghai Composite Index touched 5,178.19 points on June 15 then nosedived, repeatedly shocking senior market observers and veteran investors.

After several rounds of roller-coaster fluctuations, the index plummeted 43.5 percent from the June peak to bottom out at 2,927.29 points on August 26.

Given the disappointing economic and financial data, there is no substantial new bad news for the market, said Yang Delong, chief analyst at China Southern Fund, who does not expect further big declines.

Calling the falls "ordinary, healthy and rational corrections," Deng Haiqing of JZ Securities said there is no chance of a repeat of the A-share crash of last summer. The fundamentals of China's stock market have been improving and investors could have a good year in 2016, he added. Endi