China’s trading day was just getting underway Thursday for stockbroker Yang Xu when the markets lurched to a halt 13 minutes after their 9:30 a.m. opening.
Shares on the Shanghai Composite index had skidded 5%, prompting China’s new “circuit breaker” system to kick in and halt trading for 15 minutes. When it resumed, the selling only became more furious, and the index quickly dropped another 2 percentage points. Under the circuit breaker rules -- which are intended to check large declines -- a 7% fall means markets will be shut until the next day.
So after just more than 14 minutes of active dealing, business was over, making Thursday the shortest trading day ever in China. To make matters worse, it was the second time in four days that Chinese markets shuttered early because of price plunges; Monday’s trading day was also curtailed.
And just as happened Monday, the sell-off spread around the world.
The Dow Jones industrial average tumbled nearly 400 points, or about 2.3%, on Thursday. The Standard & Poor's 500 index sustained a similar percentage drop, and key stock indexes across Europe also fell.
"People are super-panicked," said Yang, who works for China Galaxy Securities Co. "This trend won’t halt in a short time. Prices will continue to drop. Breaking the point of 3,000 is only a matter of time.” The Shanghai Composite ended at 3,115.88 on Thursday morning.
"Many people asked me whether bottom-fishing at this moment is a good idea," Yang added. "I would tell them it's not wise to do so, because the market will continue to dive. More purchases mean more losses. They should get out of it right away."
If Yang’s clients take his advice and others follow suit, China’s markets – and others around the world – are sure to be in for more white-knuckle days. Although many experts say China’s equity markets are more speculative and less reflective of the “real” economy than in other countries, the rough start to 2016 has only exacerbated worries about China’s weakening economy and whether Chinese policymakers can respond effectively.
A move Thursday by China’s central bank to weaken the currency, known as the renminbi or the yuan, by half a percentage point was among the factors weighing down investor sentiment and raising questions about how closely Chinese regulators were coordinating their moves.
Adding to concerns were Wednesday’s North Korea nuclear test, sinking oil prices and fears that temporary measures that have prevented large Chinese shareholders from selling big stakes were about to expire.
“Obviously it’s been a disco week already … and then comes this inexplicable – to me – move to weaken the currency,” said Fraser Howie, coauthor of “Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise.” “That’s the biggest [price] fixing move down since August. So everyone decides to head for the doors.”
Kamel Mellahi of the Warwick Business School in England called the move to weaken the renminbi "a very risky one indeed."
"Using currency depreciation to stimulate growth is a double-edged sword. A weaker yuan will help boost the country's sagging exports and help economic growth, but it will also increase the risk of capital flight out of China, making investment in the stock market less attractive, and increase the cost of imports," said Mellahi, a professor of strategic management who researches the Chinese market.
Howie said that the timing of the currency move “during one of the most volatile stock market weeks for a long time, just seems to show there is zero coordination between the different regulators, the different bodies.”
“The narrative is once again lack of confidence in government policy,” he added.
The market plunges have given investors unwelcome flashbacks to summer, when Chinese stocks, riding high on a year of tremendous growth, suddenly began to plummet. By August, despite intense government intervention, China’s major indexes had shed about 40% of their value, wiping trillions from global markets.
On Thursday, losses in the southern city of Shenzhen were even greater than in Shanghai, with the Shenzhen Composite down more than 8%. About an hour after the circuit breaker halted trading on the Shenzhen Stock Exchange, office workers paced around outside of the building -- a postmodern edifice with massive statues of bulls out front -- sipping coffee and talking on their phones.
In the lobby inside, a ticker displayed an unbroken string of green numbers. (In China's stock market, green signifies loss; red, which is considered auspicious, marks gainers.)
China’s sell-off dragged down other Asian bourses. Hong Kong’s Hang Seng index fell 3% and Japan’s Nikkei was off more than 2.2%.
So far in 2016, the Shanghai Composite has dropped about 12% and the Shenzhen composite has lost more than 15%. Shanghai is about 7% below where it was at this time last year, but Shenzhen is still up 34% over early January 2015.
After Monday’s stock market slide, Chinese authorities took steps to support prices, ordering state-controlled funds to buy equities, Bloomberg News reported.
On Thursday, China’s securities regulator announced new rules limiting how large shareholders may sell their holdings. Under the measures, which take effect Saturday and replace temporary rules that expire Friday, large shareholders (those who hold 5% or more of a company’s shares) cannot sell more than 1% of the company’s total shares on the open market in a three-month period.
Data released last weekend showed a fifth straight month of contraction in China’s manufacturing sector, reviving fears that a protracted slowdown in the world’s second-largest economy could be worse than expected. In another worrisome sign Thursday, the Caixin purchasing managers' index, an economic indicator that covers manufacturing and services, fell to 49.4 last month from 50.5 in November. A score below 50 indicates contraction.
But not everyone was seeing doom and gloom. HSBC analysts in a research note on China stocks titled "Bad start doesn't mean bad end to 2016" said that government intervention was providing stability and that they expected the spike in volatility to be temporary. The bank's analysts added that leverage had come down from last summer and that liquidity and sentiment had "largely normalized."
Analysts for Standard Chartered also saw some silver lining. "We think this week’s market slump reflects a correction in the absence of supportive policies, not a worsening of growth momentum," they said in a research note. "In fact, data has improved since November, and the economy appears to have stabilized. ... Among the forward-looking indicators, those related to investment and property market are improving."
The impact of stock-market volatility on investment and consumption has been limited in China, based on historical statistics, they added.
China's securities regulator defended the circuit breaker mechanism after Monday's halt, saying it "calmed down investors and played a positive role in protecting their rights," the official New China News Agency reported. The market needs time to gradually adapt to it, the regulator said.
But Mellahi said that authorities were likely unhappy with two circuit-breaker triggers in one week. "It is sending a bad signal and driving the wrong kind of behavior," he said. "It looks like it’s generating more panic."
"This is new territory and the Chinese are learning by doing here," he added. "It’s too early to judge, but it seems the current process does not seem to be working. It needs tweaking."
Late Thursday, the China Securities Regulatory Commission announced it was “suspending” the circuit breaker system, apparently indefinitely. The regulator said while the circuit breaker was not the “main cause” of the crash, it had had a certain “magnet effect,” pulling the market down as the index approached the trigger level. A spokesman for the commission said that the effect of the circuit breaker “didn’t meet our expectations” and that China needed to “explore, experience and dynamically adjust” its regulations.
Although the move may satisfy critics of the circuit breaker system, it seemed likely to provide further ammunition to those who already regarded policymaking as hasty and haphazard.
Thursday’s very early closure of the markets brought jokes from Internet commenters, who carped that stockbrokers now had the best jobs -- with just one-hour workdays. But Yang, the broker, said that wasn't true.
“The speculation that we can go home and do not need to work after the circuit breaker is too naive," he said. "We still have to stay at work after markets dive.”
Many analysts are keeping a close eye on the value of the renminbi. The currency is allowed to move within a set band whose midpoint is fixed daily by the central bank. On Thursday morning, the rate was fixed at 6.5646 to $1. As recently as Monday, it was set at 6.5032 – or 1% higher.
“Decisions around China’s currency will be important to watch this year,” Guy Scott, an equity research analyst at Janus Capital, said after Monday’s market drop. “Historically, China has weakened its currency and exported its way out of periods of excess capacity, but that may not be an option this time because China needs a stable yuan after becoming a reserve currency of the International Monetary Fund” last fall.
“An accelerated depreciation would mean China has abandoned its desire to be a stable, global currency due to more serious concerns about its economy,” he added.
The market volatility and currency weakening has some prospective investors deciding to sit things out for now.
Zhang Fengli, a 22-year-old kindergarten teacher in Shenzhen, said she was interested in getting into the market and had scraped together about $3,000 by December. But a cousin who lost money in last summer’s plunge warned her off.
“He said the situation isn’t good and there might be another crash, and a newbie like me shouldn’t risk it,” said Zhang. After reading more about the market, she said, “the more scared I became. I’m still inexperienced, so I don’t think I can be luckier than so many experienced investors.”
“Now,” she said, “I’m happy I didn’t invest.”
Yingzhi Yang and Alexandra Li in The Times' Beijing bureau contributed to this report.
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