China closes stock markets early after shares fall 7%

Authorities in China have, for the first time, closed stock exchanges in Shanghai and Shenzhen markets early after shares fell seven percent, triggering sell-off elsewhere in Asia.

The measure was taken on Monday in what authorities described as a "circuit breaker" mechanism, which is aimed to curb further volatility in the stock market, AFP reported.

The fall in Chinese exchanges apparently followed poor data produced by governmental and private studies on the country’s manufacturing activity.

In addition, China has imposed a ban to prevent shareholders, who hold more than five percent of shares in a company, from selling shares. The ban, which was introduced in July to help defend share prices, will expire on Friday, triggering fears of a sell-off.

"The market is worried about the upcoming lifting of the rule that bans shareholders from selling," Central China Securities analyst, Zhang Gang, told AFP.

Official and private sector studies conducted on the Purchasing Manager Index (PMI) both showed contraction in the index.

To add to market woes, China on Monday cut the value of its national currency, yuan, against the US dollar, making yuan weaker than 6.5 for the first time in more than four-and-a-half years. The change came as China’s national currency is under mounting pressure from the country's economic growth slowdown.

"The weaker PMI and the weaker yuan are the likely triggers," Michael Every, head of financial markets research at Rabobank Group in Hong Kong, told Bloomberg News.

At market’s early close on Monday, the benchmark Shanghai Composite Index had tumbled 6.86 percent, or 242.92 points, to 3,296.26. At the same time, the Shenzhen Composite Index, which is used to track stocks on the country’s second largest exchange, slumped 8.22 percent, or 189.75 points, to 2,119.16.

Hong Kong closed normally but the Hang Seng Index was down 2.68 percent, or 587.28 points, at 21,327.12.

China's stock indices started to fall in the middle of 2015 as a debt-fuelled bubble burst, sending ripples through global exchanges and wiping trillions from market capitalizations.

Beijing later decided to intervene in the market in a bid to shore up share prices, taking measures that are estimated to have cost hundreds of billions of dollars. Of course, Beijing’s measure finally worked with Shanghai ending the year up 9.4 percent, while Shenzhen shot up more than 63 percent.

However, Chinese stock markets remained highly volatile with Shanghai stock market seeing a five-percent daily fall in November.

In an effort to prevent repeated fall of the market, Chinese authorities installed a "circuit breaker" system as of Monday, according to which a five-percent drop in the CSI300 index, which covers both bourses, will trigger an automatic 15-minute halt in stock trading. If the fall increases to seven percent, the two exchange markets will be closed for the rest of the day.

Analysts, however, believe that the "circuit breaker" mechanism increases the risk of interference with market efficiency and can even prove counter-productive by increasing market volatility instead of reducing it.

"The mechanism is merely a tool and it won't help the market find its true value," Northeast Securities analyst, Shen Zhengyang, said, adding, "With or without the system, the market will continue to drop further if selling pressures piles up."

The analyst added that the system will also hurt market liquidity, emphasizing that "investors who want to sell can't, and those who want to buy also can't. Trading will dry up if it gets triggered too many times."

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