Suspending Disbelief: China Stock Trading Frequently Frozen
Trading suspensions happen in developed markets but are a rare event. Indeed, not one of the largest 300 U.S. stocks missed a full day of trading in the last two decades. But in China, suspension is an all-too-common occurrence, with over one-fifth of all large-cap stocks experiencing trading suspensions in some months.
Over the last 20 years, we find in times of major structural change (the Split Share Structure Reform initiated in 2005) or during periods of severe market stress (the bubble in A shares that burst in June 2015), top-down interventions aimed at promoting stability have occurred with stunning frequency. But “voluntary suspensions” by companies are in fact common too, as firms electively halt their shares to pre-empt the effect of bad news on a stock’s performance.
For quant investors, a failure to account for this strange feature of China’s market when developing and simulating trading strategies could be disastrous.