The circuit breaker that was tripped by the plunge in mainland share prices shortly after opening on Thursday has once again proved its worth. This is at a time when investors' sentiment is being severely tested by a seemingly endless stream of depressing economic data.

This mechanism has a direct impact on the Hong Kong equity market where the H shares of many mainland enterprises are listed. The largest of these enterprises have been included as constituent stocks of widely followed market indicators.

Market circuit breakers are not unique to the mainland market. The New York Stock Exchange introduce a similar mechanism shortly after the massive share sell-off following the outbreak of the financial crisis in 2008.

But such a mechanism is of particular significance on the mainland market, which is dominated by retail investors who can be easily swayed by market rumors that may be planted by stock manipulators in the gullible media. These investors have become increasingly nervous since the stock market crash in June last year - and for good reason.

Before the crash, most mainland shares were traded at exceptionally high multiples because investors were banking on the earning potential of these companies supported by rapid economic expansion. Despite the price decline in recent months, nearly all the Shanghai-listed A shares are still trading at a significant premium to their equivalent Hong Kong-listed H shares.

The wide price disparity of up to more than 80 percent in some cases shows that there is still some way to go in the revaluation process. Nobody expects an economic crash landing. The authorities are trying to ensure an orderly and gradual adjustment in the capital market to reflect the "new normal" of slower-than-before economic growth.

Through such efforts, the stock market circuit breaker is widely seen to be playing a key role.

(HK Edition 01/08/2016 page7)