Not since 2008 have so many Chinese stocks had such a bad day.
More than 1 in 5 companies on the Shanghai Composite Index ended Thursday down by the exchange limit of 10 percent, the most since the depths of the global financial crisis, according to data compiled by Bloomberg. During the trading session, the declines were even more stark. A third of the 1,083 firms on the gauge fell about 10 percent at some point, the level where bourse rules prevent further losses.
Exchanges globally have implemented curbs to prevent erroneous transactions, panic trading and increased automation from roiling markets, and regulators have stepped up safeguards since the May 2010 plunge known as the flash crash erased more than $800 billion from the value of U.S. equities in minutes. China imposes limits on moves in stocks and funds that prevent market makers from quoting shares at values deemed too far above or below the previous closing levels.
Regulations designed to avoid excessive price swings are necessary in a market such as China’s where individual investors make up about 80 percent of equity trading, according to Brian Jacobsen, who helps oversee $250 billion as the chief portfolio strategist at Wells Fargo Funds Management.
“It’s not that institutional investors are immune from emotional trading, but they’re a bit less fickle than retail investors,” Jacobsen said by e-mail.
The Shanghai Composite’s 6.5 percent retreat on Thursday was the biggest in four months as brokerages tightened margin lending restrictions and the central bank drained cash from the financial system. Daily declines on the Shanghai exchange this month have been deeper than at any other time since 2009. At 1.65 percent, the gauge’s average retreat on down days this year is the largest among the world’s top 10 markets.
The benchmark index fell 1.9 percent at 9:51 a.m. in Shanghai, with about 13 stocks retreating by the daily limit.
Chinese stocks have seen periodic surges in volatility, bolstering the case for rules to prevent excessive moves. A trading error by Everbright Securities Co. in 2013 drove a swing of more than 6 percent in the Shanghai Composite after a glitch saw the firm send 26,082 unintended buy orders in two seconds.
Trading limits probably cushioned the mainland market from bigger losses on Thursday. In Hong Kong, where there are no caps on daily price moves, about $35 billion of market value was erased last week from three companies over two days as their stocks plunged. South Korea and Taiwan, which already have daily trading limits, are widening the bands next month.
Mainland authorities have cracked down on manipulation and insider trading in an effort to reduce risks as the rally in Shanghai stocks over the past year lured a record number of novice investors.
Record growth in margin debt helped fuel a 127 percent gain in the Shanghai gauge over the past year, the most among global indexes tracked by Bloomberg. Margin lending by brokerages on China’s main exchanges exceeded 2 trillion yuan ($322 billion) as of May 27, five times the level of a year earlier, bourse data show.
“The Chinese authorities may want to take some froth out of the market,” Geoffrey Dennis, the head of emerging-market strategy at UBS AG, said by e-mail. “But they will not want to see the market becoming unstable and suffering a total rout.”