China's regulators change rules

It didn't take long for the Chinese authorities to react on Thursday. After the new trading curbs had put an end to selling and buying at China's mainland stock exchanges for the second time in four days, the Chinese securities regulatory commission CSRC announced on Thursday afternoon that it would suspend its new stock market circuit breaker mechanism as of Friday.

The circuit breaker is based on the CSI 300 index, which tracks China's 300 largest stocks on the two exchanges - Shanghai and Shenzhen. If the index falls by five percent, 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.

"After weighing advantages and disadvantages, currently the negative effects are bigger than the positive ones. Therefore, in order to maintain market stability, CSRC has decided to suspend the circuit breaker mechanism," CSRC spokesman Deng said. According to the CSRC, the step was especially designed to protect the interests of small investors.

"China shouldn't have used a tool [the circuit breaker] of a mature market when most of its investors are individual investors who panic easily," Phillip Securities analyst Chen Xingyu told AFP news agency.

Investors have been extremely nervous about the impending end of a six-month ban on share sales by any stockholder who owns more than 5 percent of a company. The ban ends Friday.

Regulators tried to head off investors' concerns by announcing earlier in the week major shareholders could sell only in private transactions to avoid flooding the market. After Thursday's market plunge, the securities commission tightened that restriction, saying big investors can unload only the equivalent of 1 percent of a company's shares over the next three months.

Roller coaster ride for investors

"Additional volatility in China's stock market remains almost certain in the first half of 2016," said economist Brian Jackson of IHS Global Insight in a report. "China's stock market reform will remain a messy affair."

Chinese leaders encouraged small investors to pile into stocks beginning in late 2014. They wanted to raise money for state companies to pay down heavy debt loads and become profit-oriented and competitive.

Communist planners also hoped investing would help families save for retirement, easing the pressure on Beijing to pay for pensions and health care.

Those plans went wrong when markets soared faster than Beijing wanted. By May, state media that cheered on higher prices started to mix in appeals for investors to act prudently.

After prices plunged in June 2015, the government banned sales by big shareholders. It ordered state companies to buy stock, told banks to cut interest rates, and canceled initial public offerings.

The government has yet to say what its intervention cost, but Goldman Sachs has estimated state entities spent 860 billion-900 million yuan ($135 billion-$140 billion or 125-140 billion euros) to buy shares in June and July.

Market intervention levels way too low?

The Shanghai and Shenzhen stock market "circuit breakers" might be adding to volatility instead of dampening it in the way that similar measures do in Japan, Thailand and other Asian markets, economists said: The 5 percent gain or loss in the CSI 300 index that triggers a 15-minute trading suspension and the 7 percent margin that ends trading for the day might be too sensitive a threshold.

According to IHS, the mechanism would have been tripped 20 times if it had been in place in the final quarter of 2015. "It's hard to see how the circuit breakers can remain in their current form," said Bernard Aw, a market strategist at investment company IG in Singapore.

Heinz Rüttimann, emerging markets strategist at Swiss private bank Julius Baer, agreed with other financial experts that the thresholds for the suspension of trading were way too low.

"These levels just don't make sense," he said. "The Chinese securities commission is in a difficult position. The regulators have to communicate new limits, without losing their credibility," Rüttimann said.

Regulations to force institutional investors to hold on to their holdings would only add to the confusion and anxiety already in the market, the Swiss banker added. "It is irritating for investors, because they don't see a regular way of market pricing. It's very likely that such manipulated markets will be punished in the end."

Effects on China's real economy

The country's flagging economy is expected to have grown in 2015 at its weakest pace in more than two decades. On top of this, the devaluation of the Yuan this week revived investors' worries similar to those that sent financial markets into turmoil last summer.

Comments by billionaire George Soros exacerbated market jitters after he told an economic forum in Sri Lanka on Thursday that global markets could be facing a crisis like 2008, and investors needed to be extremely cautious.

But Sebastian Heilmann, Director of the Mercator Institute for China Studies (MERICS) in Berlin, does not see immediate links between China's financial markets and its real economy.

"The condition China’s stock markets are in has never been a direct reflection of how its real economy has developed. The Chinese Government rather wanted to employ stock markets as a means of raising capital for often debt-ridden state-owned enterprises."

However, in the long run, this could change, Heilmann added. "If neither the stock markets nor banks can serve as a reliable source of capital for major enterprises any longer, then this will have a decidedly negative impact on the growth of the economy."

The World Bank has already warned that the pains caused by a weakening Chinese economy would be felt around the globe. "A one percentage point drop in major emerging markets' growth would cut growth in other emerging markets by about 0.8 percentage points, and global growth by about 0.4 percentage points," said Ayhan Kose, Director of the World Bank Group's Development Prospects Group.

So investors and economists alike are keeping their fingers crossed that China's growth story is still intact - even if they don't expect to ever see double-digit growth figures in the Middle Kingdom again.

(With material from AFP.)