Chinese equities have faced a turbulent summer. Wild fluctuations in prices set off alarm bells in global markets, as well as forcing the Chinese government to step in, in an attempt to enforce stability. Through banning selling by major shareholders, to state agencies and state owned enterprises buying up falling stock, government efforts racked up a bill of $236bn. China now, however, has come up with a more permanent solution to its stock market swings, with plans for instituting a “circuit breaker” mechanism.
The Chinese equity market is particularly prone to panic buys and sells
The mechanism would see a temporary halt on trading whenever market price sees either a five percent bull or bear. According to the draft plans, this could only happen once a day. Further, a market index swing, up or down, of seven percent or greater would see trading closed for the rest of the day. According to state-owned news agency Xinhua, “China’s stock exchanges on Monday began soliciting public opinion on an index circuit breaker system,” and will continue to do so until September 21.
Commenting on the system, Yang Delong, Chief Strategy Analyst at the Southern Fund, said: “the A-share market has seen violent plunges recently, and with the circuit breaker mechanism investors would have a cooling period before taking irrational actions”.
The Chinese equity market is particularly prone to panic buys and sells due to being dominated by individual sellers that are more jittery and often do not consider the fundamentals of certain company stock due to a mistrust in the public financial reports of firms. Such a “circuit breaker” then, could provide much needed stability.
The Chinese government is also using tax incentives to encourage longer-term investment strategies. Any investor who holds on to a share for more than a year is to be exempt from the five percent dividend tax. Selling a month or sooner after purchase will incur a 20 percent dividend tax, while holding a share from between a month to a year will see a rate of 10 percent.