CHINA on Friday announced circuit breaker mechanisms to prevent systemic risk in case of sharp stock market falls and it appears close to pushing ahead long-awaited reforms for initial public offerings (IPOs).

    The circuit breaking rules for all Chinese exchanges were announced by the Shanghai Stock Exchange and will take effect Jan. 1. Sources said that plans for IPO reforms will be rolled out as early as this week.

    Deng Ge, a spokesman for China Securities Regulatory Commission (CSRC), told a briefing Friday introducing the circuit breaker mechanism will “provide a cooling period when there are sharp fluctuations in the market.”

    That in turn “will help maintain market stability and market orders and protect investors’ rights and interests and help promote stable and health development of the capital market in the long term,” he said.

    According to the new regulations, a 5 percent rise or fall in the CSI 300 benchmark index will result in a 15 minute trading suspension for all the country’s equity indices, while a 7 percent move up or down will trigger suspension of trade for the rest of the day.

    If a 5 percent move occurs after 2:45 p.m., it will also halt trade for the rest of the day.

    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 US$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 market, moving it gradually toward 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.”

    China’s moves highlight rising confidence in the government that it can move to tweak market structure without destabilizing its main indices, which have gained around 25 percent since a market crash that began in June bottomed out in August.

    The initiatives reflect both liberalization and tightening at the same time.

    Resuming a move toward converting the IPO market to a registration system instead of an approval system would address long-standing distortions in pricing and also eliminate a source of official corruption.

    IPOs were frozen over the summer as the government tried to stabilize crashing stock markets, which some blamed on an IPO glut that sapped market liquidity, but they were recently resumed.

    The sources did not have details on what the plan would contain, only that its publication is imminent.

    The establishment of circuit breakers is part of ongoing efforts to suppress market volatility even at the cost of market vigor.

    On the same day as the circuit breaker announcement, the Shanghai Futures Exchange said it will scrap a rule that allowed some kinds of high-frequency trading, a financial innovation many brokerages and funds had invested heavily in developing.

    Also Friday, regulators announced tweaks to futures market trading hours.

    Regulators recently cracked down on the use of over-the-counter derivatives swaps to fund stock trading and markets crashed more than 5 percent in a single day Friday.

    (SD-Agencies)