A circuit breaker: a symbolic market tool – Sara Hsu

China´s stock market regulators launched the idea of a circuit breaker, to avoid heavy swings at the markets. The market would be stopped for 30 minutes after an upswing or downswing of more than five percent, at most once a day. Highly symbolic, writes financial analyst Sara Hsu in the Diplomat, and it cannot be a proxy for real reform.

Sara Hsu:

For the stock market to truly be stabilized, deeper reforms are needed. For one, the proportion of institutional to retail investors must rise, as the former tend to be long-run market participants, while the latter tend to trade with higher frequency and have less expertise in market fundamentals and other aspects. To address this, officials have allowed local government pension funds to participate in the stock market. Second, the stock market should become more representative of the economy, with a greater number of privately owned firms listed. Officials should refrain from frequently halting IPOs. While this will likely mean that volatility in the stock market will have a greater impact on the real economy than it does at present, it will also mean that stock market fluctuations should logically mirror broader economic indicators and therefore should be easier to interpret for retail investors. Third, complementary reforms in the financial system must be carried out to expand private credit. The banking system suffers from insufficient competition and dampened profitability due to the dominance of the Big Four state-owned banks. The corporate bond market is immature and underused. Reforms and expansion of private credit in banks and bond markets would theoretically reduce the cost of funding in the financial market as a whole, including in the stock market.

The circuit breaker proposal has made the government look active and concerned, although excessive market intervention (with poor results) has been blamed for reducing market confidence. The proposed action may not be overly impactful, since a circuit breaker is already in place. Moreover, deeper reforms must be carried out within China’s stock market and broader financial markets if Beijing is to root out inefficiencies, including irrational volatility.