Chinese stock market volatility leaves regulators searching for answers

Chinese stocks went into a free fall for the second time in less than a week Thursday, forcing an emergency halt in trading. 

People walk past a panel displaying China stock market indexes in Hong Kong, Jan. 7, 2016.

Chinese stock prices dropped by 7 percent in just 29 minutes Thursday, sending shockwaves through the global economy.

Stocks went into free-fall until the Chinese government abruptly halted trading using a “circuit breaker” system, which stops trading completely if there is a 7 percent decline in the Shanghai and Shenzhen CSI 300 Index. 

That volatility shook European and US markets early Thursday. The Dow lost as many as 320 points Thursday morning before recovering somewhat; it was down 220 points in the early afternoon. 

Thursday’s abrupt market closure was the second time since Monday that trading was halted, initially prompted by reports of sluggish manufacturing growth in mainland China. The global price of crude oil was also impacted, both by China’s slowing economic growth and by ongoing tensions in the Middle East, fueled in part by Saudi Arabia’s recent decision to sever diplomatic ties with Iran.

The Chinese government launched the circuit breaker system at the start of this year in an attempt to control the volatility of the Chinese market, which has been experiencing extreme highs and lows since June of 2015. That summer, a rise in investor confidence caused the market to eventually become oversaturated. In August, stocks plummeted. 

Critics argue that the system adds to an already-unpredictable market, rather than easing investor fears. One reason: it may push investors to sell more quickly.

"It is clearly adding some unintended consequences, such as people trying to sell before the break, which is actually accelerating the decline," Gerry Alfonso, a trader at Shenwan Hongyuan Group Co. in Shanghai, told Bloomberg.

In the wake of Thursday's selloff, the China Securities Regulatory Commission (CSRC), the public body in charge of regulating China’s economy, decided to suspend the system. Still, the People’s Bank of China intends to play a large regulatory role in the currency market, including restricting the arbitrage between onshore and offshore yuan rates.  The Chinese government continues to devalue the yuan in order to stabilize its weakened exports.  

Global stock markets continued to slide after the announcement from the CSRC. Crude oil remains below $35 a barrel.

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