China shares trade suspended

The benchmark Shanghai Composite Index closed down 7.04 percent to 3,125.00 on Thursday, while the Shenzhen Composite Index, which tracks stocks on China's second exchange, tumbled 8.24 percent to 1,958.09. China's two main exchanges were open for less than 15 minutes, apparently the shortest trading day in the quarter-century history of China's modern stock market.

The second suspension of shares trading in China this week was triggered by a new circuit breaking mechanism, which went into force at the beginning of the year as part of efforts to reduce volatility on China's stock markets following a crash in mid-2015 that sent jitters through world markets.

The system is based on the CSI 300 index which tracks China's 300 largest stocks. If the index falls by five percent, the markets are suspended for 15 minutes. But when trading resumed after the initial halt on Thursday it took only one minute for the seven percent threshold to be reached, prompting a shutdown for the rest of the day.

Analysts said Beijing's introduction of the "circuit breaker" had proved counter-productive, with investors worried they would be unable to sell shares they didn't want, rather than reassured over market stability.

Phillip Securities analyst Chen Xingyu said the use of the circuit breaker was the main reason for the falls as investors had panicked after seeing it being triggered on Monday.

"The circuit breaker has cut off the market liquidity and investors are afraid they won't be able to sell. The market-selling pressure was originally not this heavy," he told the news agency AFP.

China growth concerns

The rout of Chinese stocks also came amid worries over slowing growth in the world's second-largest economy after China's central bank on Thursday again devaluated the country's currency.

The People's Bank of China (PBOC) surprised markets by setting the yuan's official midpoint rate at the lowest since March 2011, thus prompting the currency's biggest daily drop since last August, when a near 2 percent devaluation roiled markets.

The move triggered fears that China might be aiming for a competitive devaluation to help its struggling exporters, and sent regional currencies into a tailspin.

ANZ bank said in a note that the PBOC's action would create a "one-way expectation" of further depreciation in the currency, "propelling capital flight and leading to significant financial instability."

Declining forex reserves

As if to demonstrate the pressure on the currency, China later released its foreign exchange reserve data for December, showing a massive drop by $107.9 billion drop (100 billion euros) - the biggest monthly decline on record, and taking the total fall for 2015 to a record $512.7 billion.

China's reserves remain the world's largest, at $3.33 trillion, but some fear such data and the yuan's slide suggest the world's second-largest economy is in deepening trouble.

Michael Every, Rabobank's Head of Markets Research, Asia-Pacific, said he had expected policymakers would let it slip to cope with a slowing, deflationary economy.

"Why people are panicked is because they didn't see this coming, and/or the global economy needs a consumer of last resort, and China is sending a signal that they won't be it," he told Reuters.

More controversial measures

To help stem the shares sell-off, China's securities regulator also unveiled new rules on Thursday to restrict selling by big shareholders who have been locked into their holdings for six months since Beijing banned them from offloading stocks to arrest a summer market crash.

In rules that take effect on Jan. 9, investors are not allowed to sell more than 1 percent of a listed company's share capital every three months. The new rules didn't go down well with investors.

Alberto Forchielli, founder of Mandarin Capital Partners, said the decision was "crazy," adding: "They have ruined whatever hope investors still had in the market."

uhe/tk (AFP, Reuters, dpa)