China Shuts Down Its VIX To Halt Market Turbulence

While most of the world saw regional equity markets covered in red overnight, China's Shanghai Composite rebounded, rising 2.2% for two reasons: i) a delayed reaction to global equity prices after the country's 5-day Lunar New Year holiday and ii) China's latest crackdown on anything that can precipitate a selloff, like a high VIX for example.

And so, just like on August 24, 2015 when the US market crashed so hard in the pre-market, the VIX briefly "went offline" as input signals went haywire, China also decided to stop updating its local version of the VIX Index, taking its latest step to discourage speculation in equity-linked options after authorities tightened trading restrictions last week.

As Bloomberg first reported, China's state-run Securities Index Co. didn’t publish a value for the SSE 50 ETF Volatility Index on its website Thursday. An employee who answered a Bloomberg phone call said the company stopped updating the measure to work on an upgrade, however according to "people familiar", the move was designed to curb activity in the options market.

It’s unclear when the index will resume.

Just like the US VIX, the SSE 50 volatility index is the most widely-followed indicator of Chinese investor anxiety. Which is a problem because also just like the VIX, the index doubled in the span of a few days earlier this month. And the last thing Beijing wants is nervous investors thinking that other investors are nervous... and selling in a blind panic. 

So what to do? Why shut it down of course, just like all global equity markets will be shut down once the real selling begins.

According to Bloomberg, the decision to stop publishing the index forms part of a broad effort by Chinese officials to contain market turbulence.

Other measures this month have included volume limits on active options traders and informal directives encouraging some major stockholders to purchase more shares. Chinese leaders have in the past faced criticism for meddling too much in markets, particularly during the nation’s 2015 equity crash.

The VIX blackout follows tighter curbs on options traders unveiled from Feb. 12, people familiar with the matter said last week, in part because they were alarmed by a gain of as much as 2,250 percent in the price of one bearish contract on the SSE 50 ETF (also known as the China 50 ETF). The fund is China’s only equity-linked product with options.

Demonstrating surprising wisdom, unlike the U.S., China has avoided approving derivatives and funds tied to its volatility gauge. And while it won't have its own homegrown XIV collapse, China has more than enough potential candidates that will unleash the next crisis: just last night we reported that while China may not have inverse VIX ETFs, it has another, far more serious problem - pervasive stock loans, hundreds of which have seen margin calls in recent days, forcing dozens of companies to simply halt trading.

In fact, a pattern is emerging in China: any time there is a problem with any one asset, or any one indicator... why, just turn it off.

For now these "solutions" are working: volume in the SSE 50 ETF options was about 40% lower than the 20-day average on Thursday, according to data compiled by Bloomberg. What traders are more interested in is what happens when the volume hits 0% and nobody trades anymore, and - tied to that - what happens when China's creeping admission that its capital markets are broken finally seeps through.