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July, 1, 2016

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'Circuit breaker' closes China stocks for 1st time after 7% drop

SHANGHAI -- Mainland 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 7 percent 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 capitalizations.

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 so the markets remain volatile — Shanghai saw a 5-percent daily fall as recently as November. As part of their efforts to prevent a repetition of the rout, authorities instituted the "circuit breaker" system from Monday.

Under it, a 5-percent drop in the CSI300 index, which covers both bourses, triggers an automatic 15-minute trading halt. A fall of 7 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 find its true value," Northeast Securities analyst Shen Zhengyang told AFP. "With 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."

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A woman takes a nap as a man looks at an electronic board displaying stock prices at a brokerage house in Beijing, Monday, Jan. 4. (AP)

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