China's stock market tumbled and suffered its shortest trading day in its 25-year history on Thursday, as Beijing's growing tolerance of a weaker currency intensified concerns about capital flight and the health of the world's No. 2 economy.
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Markets stopped trading about 30 minutes after they opened, as a newly installed mechanism to limit volatility was triggered for the second time this week.
The benchmark Shanghai Composite Index ended the dramatically brief trading day down more than 7% at 3125.00.
"I am speechless. I was about to clear my position but I couldn't since the stock already fell by its 10% daily trading limit," said Gu Yuan, a Shanghai-based retail investor.
Pessimism spread quickly in the market after the People's Bank of China set the daily yuan reference-exchange rate against the U.S. dollar 0.5% weaker compared with Wednesday's level, marking the largest adjustment toward yuan weakness since Aug. 13.
"The plunge in stocks was mostly caused by expectations that the yuan will depreciate further, which will raise worries over the country's economic conditions," said Qian Qimin, a senior analyst at Shenyin Wanguo Securities.
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The selloff was reminiscent of the similar but more drawn-out episode on Monday, the first day the circuit breaker trading curb was in effect.
The circuit-breaker system is triggered by sharp moves in an index that tracks that largest 300 stocks listed in Shanghai and Shenzhen, the CSI 300. When the index moves 5%, trading is automatically halted for 15 minutes, while a 7% move stops trading for the remainder of the session.
The CSI 300 Index tumbled 5% within 10 minutes after trading began on Thursday, which triggered the initial 15-minute halt.
When trading resumed, the selloff became even more pronounced and within five minutes, the CSI 300 Index extended its plunge to 7%, which brought the day's business to an abrupt end.
More than 1,600 stocks fell by their daily 10% downward trading limit Thursday, according to Wind Information.
As Chinese stocks tumbled, China's yuan fell as much as 0.6% onshore. In the offshore market, where the yuan is traded freely, the yuan fell as much as 0.9%.
The onshore-traded yuan is now down 1.5% for the year, after posting its largest annual loss last year. The daily fix was set at 6.5646 against the U.S. dollar, its weakest level since 2011. While traders had expected the yuan to weaken this year, the pace of depreciation has taken many by surprise.
"They've confused enough people this week," said Ashley Perrott, head of pan-Asia fixed income at UBS Global Asset Management in Singapore. "Sentiment is incredibly fragile."
The offshore yuan is now down 2.7% for the year, at a record low against the U.S. dollar.
China's central bank attempted to soothe investor nerves and clarify its position, stressing the need to keep the yuan stable and at an equilibrium level, while attributing the yuan's moves to speculators.
Its statement, released Thursday morning, said "some speculative forces are trying to reap gains from playing [the] renminbi," using another name for the yuan.
Those trading activities "have nothing to do with [China's] real economy" and have only caused "abnormal fluctuations" in the currency, the PBOC said.
By letting the yuan depreciate, Beijing is acknowledging that the economy faces greater challenges this year and any boost that a weaker currency gives to exports would help, economists said.
While Chinese leaders have been trying to keep the economy on a measured path downward, investors are betting that the government will have to let the yuan fall further to maintain growth momentum.
"China has a tendency to muddle through, a bit of reform, a bit of growth," said Oliver Barron, China research director at North Square Blue Oak, an investment bank. "The fact that the stock market has collapsed twice in four days in January signals there's a lack of confidence."
The sharp depreciation in the yuan in recent weeks should--in theory--help Chinese exporters that were hit hard last year by the strong Chinese currency. A stronger currency tends to make goods more expensive in overseas markets. Since Aug. 11, the yuan has depreciated 6.1% against the U.S. dollar.
But China's actions now have such enormous global spillover effects, which could blunt any benefits, analysts and exporters said.
In the business world, Chinese exporters say their overseas customers quickly demand discounts in line with currency depreciation moves, which negates much of the benefit that they would otherwise receive.
The same thing tends to happen in global currency markets as other nations depreciate their currencies in tandem with the yuan to maintain competitive position. "There certainly is a huge risk of currency wars breaking out," Mr. Barron said.
The potential economic dividend is also tempered somewhat, since exports are now a less important economic driver than they were five years ago. Chinese companies now also face higher land, labor and environmental-related costs that have driven business to lower-cost nations, economists said.
Also Thursday, the China Securities Regulatory Commission announced after the trading halt that shareholders who own 5% or more of a listed company will be barred from selling more than 1% of its total shares outstanding, and will be required to inform exchanges of any sales plans 15 trading sessions in advance.
The trading limit, set to last three months, succeeds a six-month ban on sales by large shareholders that the regulator imposed on July 8, as it sought to halt the market's summer collapse. The new rule is meant to "prevent concentrated share reduction" and "stabilize market expectations," according to a statement posted Thursday on the CSRC website.
Lingling Wei, Yifan Xie, Anjani Trivedi and Mark Magnier contributed to this article.
Write to Shen Hong at firstname.lastname@example.org