China to Start Stock Circuit Breaker in January to Calm Swings

China will start a stock-market circuit breaker at the beginning of next year to help calm volatility after the summer rout sent price swings in the benchmark index to 18-year highs.

A move of 5 percent in the CSI 300 Index would trigger a 15-minute halt for stocks, options and index futures, while a swing of 7 percent would stop trading for the remainder of the day, the Shanghai stock exchange said in a statement on its website.

Turmoil in China’s stock market sent a gauge of price swings to its highest level since 1997 earlier this year as leveraged investors unwound bullish bets on concern valuations were unjustified amid slowing economic growth. To halt the $5 trillion plunge, the government banned share sales by major investors and allowed more than 1,400 companies to suspend trading.

“The introduction of this mechanism is another effort from China to stabilize the local stock markets, moving it gradually towards that of developed markets,” said Bernard Aw, a strategist at IG Asia Pte in Singapore. “They need more than just circuit breakers to stabilize volumes. Increased institutional and foreign participation is another part of the equation to reduce excessive volatility.”

The proposal was first announced by the nation’s exchanges in September. The CSI 300 index includes some of the largest companies traded in both Shanghai and Shenzhen, the bourses said in a statement then.

Individual stock price moves on mainland Chinese bourses are already subject to a 10 percent daily limit, while the so-called T+1 rule prevents investors from buying and selling shares on the same day.

China’s planned limits for stopping trading are more cautious than in the U.S., which installed market-wide circuit breakers after the 1987 crash. A 7 percent drop by the Standard & Poor’s 500 Index would trigger a 15-minute halt for companies listed on the New York Stock Exchange and Nasdaq Stock Market.

— With assistance by Kyoungwha Kim, and Steven Yang

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