World could face months of Chinese market aftershocks

China's market regulators say they are suspending a mechanism that automatically halts trading when stocks fall sharply.

The mechanism, which was implemented at the beginning of the year, has been triggered twice this week. On Thursday trading was stopped after just 30 minutes.

The China Securities Regulatory Commission announced the decision.

China's market has fluctuated wildly in the past year, despite government efforts to stabilise it. Economists say the current "circuit breakers" may be adding to volatility because they have too low a threshold.

The halts would have been tripped 20 times the final quarter of 2015, according to IHS Global Insight.

The circuit breakers pause trading for 15 minutes if a key index falls five per cent and stop it for the day with a decline of seven per cent.

China's stock market slipped about 7 per cent Thursday after the yuan fell to its lowest level against the dollar since March 2011. Trading was automatically suspended as a result. That set off another slump in Asian and European stocks.

In the United States stocks sank on spreading fears about the health of China's economy. Technology and financial companies were among the hardest hit. The Dow Jones industrial average skidded 308 points, or 1.8 per cent, to 16,598 as of 1:23 p.m. Eastern. The Standard & Poor's 500 index lost 38 points, or 1.9 per cent, to 1,951. The Nasdaq composite index lost 118 points, or 2.5 per cent, to 4,716.

Year 2016 has started with a series of warning signs about China's economy, the second-largest in the world and a major driver of global growth.

The latest trigger was currency jitters, but Thursday's plunge in Chinese stocks was just one in a series of aftershocks from last year's boom and bust that could shake markets for months to come.

Investor anxiety over economic weakness and a possible glut of unwanted shares flooding the market have complicated Beijing's efforts to withdraw emergency controls imposed after Chinese stock prices collapsed in June.

The benchmark Shanghai Composite Index more than doubled between late 2014 and June, then dived 30 per cent. Supported by a multibillion-dollar government intervention, the market rose almost 25 per cent in the final months of 2015, only to collapse in the new year. That left the main index down 15 per cent from its December peak.

Wild price swings could continue through the first half of this year, according to financial analysts. Even after the latest declines, the Shanghai index is up 36 per cent from October 2014.

"The market still is trying to find a bottom, and that takes time," said Chen Yong, a strategist at Lianxun Securities. "The key is to be able to resume normal daily trading, and during that time volatility is inevitable."

The upheaval disrupted the ruling Communist Party's plans to use the stock markets as a tool to make China's state-dominated economy more competitive and productive.

Economic growth fell to a six-year low of 6.9 per cent in the July-September quarter and is forecast by the International Monetary Fund to decline further to 6.3 per cent this year. Monday's stock price plunged was triggered by surveys that showed manufacturing in December was weaker than expected.

The latest bout of selling was fuelled by concern Beijing is letting China's yuan weaken too fast against the dollar. The yuan, also known as the renminbi, has drifted down by 6 per cent against the US currency since the central bank adopted a mechanism in August it said would make the state-set exchange rate more market-oriented.

The yuan's link to the dollar meant it soared as the US currency climbed over the past year, making it overvalued by 10 to 15 per cent against those of other developing countries. But the prospect Beijing would close such a large gap fuelled fears it might lead to an outflow of capital, weakening China's economy and reducing the supply of money to support share prices.

Thursday's exchange rate of 6.5646 yuan to the dollar was the lowest since March 2011.

"The government hopes to see the yuan depreciate to stimulate exports and the economy, but the speed of depreciation went too fast," said analyst Zhang Gang of Central China Securities.

Investors also were skittish about the impending end Thursday of a six-month ban on share sales by any stockholder who owns more than five per cent of a company, according to Zhang.

Regulators tried to head off such concern by announcing earlier in the week major shareholders could sell only in private transactions to avoid flooding the market. After Thursday's market plunge, the securities agency tightened that restriction by saying they can unload only the equivalent of 1 per cent of a company's shares over the next three months.

"Additional volatility in China's stock market remains almost certain in the first half of 2016," said economist Brian Jackson of IHS Global Insight in a report. "China's stock market reform will remain a messy affair."

Chinese leaders encouraged novice investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive. Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.

Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently.

After prices plunged in June, the government banned sales by big shareholders, ordered state companies to buy stock, cut interest rates and cancelled initial public offerings.

The government has yet to say what its intervention cost, but Goldman Sachs has estimated state entities spent 860 billion-900 billion yuan (US$135 billion-US$140 billion) to buy shares in June and July.