Chinese authorities for the first time closed the Shanghai and Shenzhen stock exchanges early under a "circuit breaker" mechanism to curb volatility after shares fell seven percent on Monday, raising concern over their commitment to market openness.
China's stock indices plummeted in mid-2015 as a debt-fuelled bubble burst, sending ripples through global exchanges and wiping trillions from market capitalisations.
The falls prompted wide-ranging intervention by Beijing to prop up share prices.
The measures are estimated to have cost hundreds of billions of dollars, but worked -- Shanghai ended the year up 9.4 percent, while Shenzhen soared more than 63 percent.
Even (Taiwan OTC: 6436.TWO - news) so the country's markets remain volatile -- Shanghai saw a five percent daily fall as recently as November. As part of efforts to prevent a repetition of the rout, authorities instituted the "circuit breaker" system from Monday.
Under it, a five percent drop in the CSI300 index, which covers both bourses, triggers an automatic 15-minute trading halt. A fall of seven percent means the two exchanges are closed for the rest of the day.
But analysts said the "circuit breaker" risked interfering with market efficiency and could even prove counter-productive, heightening volatility instead of reducing it.
?The mechanism is merely a tool and it won?t help the market finding its true value," Northeast Securities analyst Shen Zhengyang told AFP. "With (Other OTC: WWTH - news) or without the system, the market will continue to drop further if selling pressures piles up."
"What worries me the most is the enforcement of the system will also hurt market liquidity," he added. "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."
- Manufacturing concern -
Global markets stuttered Monday as a flare-up in tensions between Iran and Saudi Arabia raised concerns about the volatile Middle East. But the Chinese falls followed poor data from official and private surveys of manufacturing activity in the world's second-largest economy.
In addition, a ban preventing shareholders with holdings of more than five percent in a company from selling shares -- introduced in July to help defend 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 Purchasing Manager Index (PMI) surveys both showed contraction, heightening concerns over the health of the key sector.
China on Monday also cut the yuan?s value against the greenback, making it weaker than 6.5 for the first time in more than four-and-a-half years, as pressure on the currency mounts from the country's 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.
By Monday's early close the benchmark Shanghai Composite Index had tumbled 6.86 percent, or 242.92 points, to 3,296.26.
The Shenzhen Composite Index, which tracks stocks on China's second exchange, slumped 8.22 percent, or 189.75 points, to 2,119.16.
Hong Kong closed on its normal schedule but the Hang Seng Index (Other OTC: HGSXF - news) was down 2.68 percent, or 587.28 points, at 21,327.12.
"Circuit breakers" are not unique to China. The New York Stock Exchange put them into place in the late 1980s, following market crashes. They were first triggered in 1997, the year of the Asian financial crisis, and have rarely gone into effect since.
The device was envisioned as a fail-safe that would give panicking investors an opportunity to rethink their investment decisions, but the threshold for an early market close is signficantly higher: a 20 percent fall.
Zheshang Securities analyst Zhang Yanbing said that although the Chinese circuit breaker temporarily interrupted the fall on Monday, the market was "on a downward trajectory".
"The mechanism is only designed to curb daily volatility, and it?s still a new system", he said. "It (Other OTC: ITGL - news) ?s hard to tell whether the use of the system will reduce or increase the market swings in the future."