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China's New Chapter
After Another Market Slide, China Removes “Circuit Breaker”

One reporter counted 857 seconds. That’s how long Chinese traders worked this morning before a 7% drop triggered the so-called “circuit breaker” mechanism Chinese regulators put in place last year, shutting down the markets for the rest of the day. When they opened, European traders picked up where China’s had left off and the FTSEurofirst 300 index was down 3.6% at one point. Then came the news, via Reuters, that China had removed the circuit breaker because (via Chris Buckley) it “did not achieve the anticipated outcome.”

The proximate cause for the panic, analysts said, was the People’s Bank of China’s decision to lower the benchmark rate for the yuan by 0.5 percent from Wednesday, the biggest such devaluation since August 13 of last year, the height of the previous episode of Chinese market volatility. Yet since August 11, the PBoC has said it will let market forces determine more of the value of the yuan, and that it wouldn’t be fixed entirely artificially. As the FT observes, today’s weakening “was actually smaller than the 0.61 per cent weakening seen in the foreign exchange markets on the previous day.”

All of this is to say that the weakening of the yuan, and thus the market sell-off, appears to reflect the market’s fears about the health of the Chinese economy and not just some technicalities with the way the markets are regulated. But whatever the cause, we can expect these market fluctuations—and China’s policy experimentation in managing them—to create further political complications for Beijing and President Xi Jinping, who is already walking a fine line between stability and reform.

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