China may restrict stock sales to stem falls

The decline in the Chinese shares continued today after Monday trade was halted because of a collapse of 5% of the stock exchanges. The benchmark Shanghai Composte lost 1.5% to 3,246.61 points, while the Hang Seng ended the day with 0.8 percent down to 21,168.81 points. Monday's suspension of trading led to a global equities sell-off, but today Chinese shares extended losses in a volatile session.

The Shanghai Composite fell 0.3% to close at 3,287.71 points, although it had opened more than 3% lower.

Hong Kong's Hang Seng index also fluctuated through the day, and ended 0.7% lower at 21,188.72.

Trading in Shanghai was suspended early on Monday under a new rule designed to limit dramatic falls in markets.

But regulators said on Tuesday they may restrict stock sales to stem falls.

The China Securities Regulatory Commission said it would consider restricting the proportion of shares that major shareholders could sell during a given period of time.

The central bank also injected an unexpected 130bn yuan (£13.55bn; $19.94bn) into the market to keep borrowing costs down - in a move to reassure retail investors.

The measures, however, did little to prevent Chinese shares from falling in afternoon trade.

More volatility ahead?

Analysts said investors were waiting to see if Beijing could stem the latest selling in Chinese stocks and whether more measures would be introduced.

But Bernard Aw, market strategist at trading firm IG, said Beijing was arguably more concerned about economic growth than the stock market.

"Furthermore, it could look really bad if they have to throw in more measures when they are in the process of withdrawing the [last] rescue measures," he said in a note.

The new "circuit breaker" rule that suspended trading nationwide for the first time on Monday was created after sharp falls last summer and was meant to curb market volatility in China.

Monday's 7% fall in China spooked global markets. 

Overnight, US benchmark indexes lost up to 2% as concerns grew that the dive in the Chinese stocks was the start of another volatile period after last summer's dramatic market rout.

Oil continues to weigh

Escalating tensions in the Middle East, which affected oil prices, also dented investors' confidence.

Oil prices were flat after rising as much as 4% on Monday following the dispute between Saudi Arabia and Iran. 

Japan's Nikkei 225 index ended 0.4% lower at 18,374.00, while Australia's S&P/ASX 200 closed down 1.6% at 5,184.43.

Only South Korean shares bucked the downward trend after a senior finance ministry official said the government would take action to stabilise the market if needed, following Monday's steep plunge.

The Kospi finished up 0.6% at 1,930.53.

Worst start ever

Shanghai Stock Exchange started the new trading year with worst performance in its history. For the first few hours after its opening, the main stock index CSI 300 plunged by 7.02%.

The worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting the nation’s new market circuit breakers to the test on their first day.

Trading was halted at about 1:34 p.m. localtime on Monday after the CSI 300 Index dropped 7 percent. An earlier 15-minutesuspension at the 5 percent level failed to stop the retreat, with sharesextending losses as soon as the market re-opened. Traders said the halts tookeffect as anticipated without any major technical problems.

The world’s second-largest stock market began the year on a down note after data showed manufacturing contracted for a fifth straight month and investors speculated that the end of a ban on share sales by major stakeholders may come as soon as this week. Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990.

"This is a pretty dramatic start of trading for the year,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which manages about $45 billion. “Some investors may have been unwinding their positions when trading volumes were light. That could have exaggerated the moves. The market has been very difficult to predict.”

Monday’s selloff rippled through regional equity markets, with Asian shares and U.S. equity-index futures extending losses. Chinese stocks’ influence on global markets has increased after the nation’s $5 trillion equity market rout, when the Shanghai gauge tumbled more than 40 percent from mid-June through its August low, rattled investor confidence in the world’s second-largest economy.

Brokerages were prepared for the circuit breakers after conducting tests on the new mechanism last month, according to William Wong, the head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Under the circuit breaker rules finalized last month, a move of 5 percent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 percent closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02 percent before trading was suspended. The Shanghai Composite Index lost 6.9 percent.

Individual investors in China, who drive morethan 80 percent of trading, may have rushed to sell after the first circuitbreaker took effect to avoid getting stuck in positions by the 7 percentsuspension, according to Andrew Sullivan, managing director for sales tradingat Haitong International Securities Group in Hong Kong. It took just sevenminutes for the second halt to come into effect as shares tumbled after thefirst suspension ended, according to data compiled by Bloomberg.