Before discussing the connection between the circuit breaker mechanism and the A-share market, let’s take a look at some weird onion “news” in 2015:

“Art Museum’s Art Exhibition to Celebrate the 70th Anniversary of the Anti-Fascist Victory” Events for the 70th anniversary of the anti-fascist victory were suspended”

“Russia vetoed Ukraine’s Security Council proposal to remove Russia’s one-vote veto”

“A man in Shanghai was found guilty of spreading rumors. And was detained for 15 days and was detained for 15 days”

Then we can also summarize the circuit breaker mechanism with a news title:

“Chinese stock market’s circuit breaker was stopped urgently to prevent deterioration. The mechanism was stopped urgently to prevent deterioration"

Back to the topic, what is the real reason why the circuit breaker mechanism was stopped?

The answer is simple: the circuit breaker system has caused a liquidity panic.

In a market without liquidity, funds can only go out but not come in. The stock market is different from the real estate market and the vegetable market. If the house cannot be sold, you can still live in it, and if the vegetables cannot be sold, you can still live in it. Stocks that cannot be sold have no use value.

Regarding the issue of liquidity, the Shenzhen Stock Exchange Research Institute wrote a report on the circuit breaker in 2015 (pictured). It is clearly stated that: the 7% fuse is too close to 5%, which can easily cause a magnetic attraction effect; at the same time, the 7% fuse time is too long, which will affect market continuity and liquidity. However, the China Securities Regulatory Commission did not adopt it and decided in December. The circuit breaker mechanism was implemented on time on January 1, resulting in two consecutive circuit breakers and plummeting this week.

Is the circuit breaker really the main reason for this week’s plunge? Yes and no. The market crash is actually the result of multiple factors, and the circuit breaker mechanism is only the fundamental factor behind it.

1. The exchange rate depreciates and arbitrage funds leave the market.

According to Newsfeed’s calculations, there are approximately more than 1 trillion U.S. dollars of arbitrage funds in the country, and most of them are short-term U.S. dollar borrowings within one year. The expectation of RMB depreciation has been formed, and this part of the funds needs to leave the market as soon as possible. . The rapid decline in foreign reserves is proof of this.

2. The financing balance has returned to a high level, and the market has a trend of adjustment.

The current financing balance is about 1.1 trillion, which is already the same as in March 2015. After the mid-year slump, many liquidated positions no longer have the ability to increase leverage. The index corresponding to the financing balance may already be At the limit, a little external force will cause the index to plummet. In the middle of the year, I checked the capital allocation, and this time it was the exchange rate.

3. The economic data is really bad and structural adjustment has not been completed.

All indicators of the general environment have declined across the board, the debt data is unbearable, and the financial industry is still increasing leverage.

4. Circuit breaker reduces the cost of short positions.

According to the current opening restrictions on stock index futures, the ability of shorts is actually limited, and they do not have the ability to directly hit the market. This sharp drop is an internal adjustment in the market, and the magnetic attraction effect of the circuit breaker is there. The shorts will follow suit. The trend is just about making money.

5. There is a high probability that prices will continue to fall in the future.

Throughout the history of A-shares, except for the first three years of the A-share Shanghai Index, there has never been three consecutive positive years since then.

Therefore, if we continue to stop the circuit breaker mechanism, we are really going against the natural laws of the market. The most important thing in the stock market is to go with the trend, follow the market, and never go against the market. I think this is probably what the market teaches people about, and it is the real reason why the circuit breaker mechanism was stopped.