CHINA’S plan to introduce a stock market circuit breaker would help calm volatility after price swings in the benchmark index surged to an 18-year high, according to analysts in a survey.

    Twelve of the 15 respondents were in favor of the proposal while remainder were against. Under the current plan, a move of 5 percent by the CSI 300 Index would trigger a 30-minute halt for stocks, options and index futures, according to a joint statement by the Shanghai and Shenzhen bourses and the futures exchange.

    Turmoil in China’s stock market sent a gauge of price swings to its highest level since 1997 as leveraged investors unwound bullish bets on concern valuations were unjustified amid the slowing economy. Volatility has remained elevated despite unprecedented government intervention to stop a US$5 trillion rout, including banning share sales by major investors and at one stage in July allowing more than 1,400 companies to halt trading.

    “If there is a fair and transparent circuit breaker mechanism in place, it should help to stabilize the market during the most vulnerable times,” said Cedric Ma, a Hong Kong-based senior investment strategist at Convoy Asset Management Ltd., which oversees about US$500 million in assets. “It’s far better than letting companies suspend their shares from trading on their own.”

    Under the plan, a move of 7 percent by the CSI 300 measure would halt trading for the remainder of the day. The rules would also apply to convertible bonds and some other equity-related securities. The CSI 300 index was chosen because it includes some of the largest companies traded in both Shanghai and Shenzhen, according to the statement. Feedback on the plan is being accepted until Sept. 21.

    China worked to soothe concern over its economy at the Group of 20 gathering in Turkey earlier this month, with officials predicting stabilization in the currency and stock market in the coming weeks. People’s Bank of China governor Zhou Xiaochuan said State intervention prevented systemic risk and stopped a free-fall.

    For Francis Cheung, head of China strategy at CLSA Ltd., the concept would be a positive step, provided officials are clear about the rules.

    “The upside I see is if the government institutes circuit breakers, then it will no longer intervene in the stock market,” said Cheung. “But this is not assured.”

    A circuit breaker could replace existing restrictions on trading as the government moves toward closer integration with global markets, according to Mo Haibo, a director at Wanjia Asset Management Co.

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

    “A circuit breaker is necessary in the long term for protection under extreme market circumstances as China is very likely to scrap the 10 percent daily limit and the T+1 trade rule,” said Mo. “Current trading rules may need to be revamped if the circuit breaker is introduced while daily limits are still in place.”

    A circuit breaker could increase intraday volatility as investors rush to buy or sell shares before the halt is triggered, according to Daniel So, a strategist at CMB International Securities Ltd. in Hong Kong. The CSI 300 has risen or fallen by 5 percent on 20 occasions in the past three months and half of those times daily moves exceeded 7 percent.

    “It might cause more extreme market movements because investors would fear being too slow to react to good or bad news,” So said. The halt would also increase selling pressure in Hong Kong, where the same companies would still be trading, he said.

    China’s planned limits for stopping trading are lower than in the United States, which installed market-wide circuit breakers after the 1987 crash. (SD-Agencies)