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A man walks past a panel displaying the benchmark Hang Seng index during afternoon trading in Hong Kong, China January 4, 2016. Hong Kong stocks posted their biggest fall in three months on Monday, marking a gloomy start for 2016, pulled lower by slumping mainland shares and weak global markets.BOBBY YIP/Reuters

With a darkening outlook for its manufacturing sector and a falling currency, China staged an ugly entrance into the new year, its markets tumbling so rapidly that trading had to be halted shortly after lunch.

Just after 1:30 p.m., a 7 per cent fall in the CSI 300 index triggered for the first time a circuit-breaker mechanism that shut down all trading for the remainder of the day in Shanghai and Shenzhen. The index tracks the largest stocks on the two exchanges.

It was the 14th-worst day for the CSI 300 in the past decade. Chinese stocks have never started a year with a worse performance, renewing fears about the health of the world's second-largest economy, whose slipping GDP numbers and weakening outlook stand to weigh on global growth in 2016.

Monday was the inaugural day for the Chinese stock market circuit breaker, which was designed to stop the kind of single-day routs that marked the 2015 trading year.

Its immediate use was "not an auspicious beginning to the year," said Thomas Schroeder, the Bangkok-based founder and managing director at Chart Partners Group Ltd. "And the first day of trading sort of sets the tone for the whole year."

Mr. Schroeder, a technical analyst who used past trends to call the top of Chinese markets in 2015, believes the Shanghai Composite Index will tumble to 2,400 this year, well below last year's bottom of 2,927, which it hit August 26. The index closed at 3,296 on Monday.

"I'm looking for fresh new lows in China in 2016," he said. "A lot of the commodities still look bearish, and the U.S. dollar looks strong against the yuan. So I think the data will continue to disappoint."

On Monday, the yuan briefly dropped to a five-year low against the greenback in offshore markets, its biggest tumble since an August currency devaluation of roughly 2 per cent sparked global panic.

That followed the release of the Caixin China Manufacturing PMI index which, at 48.2 in December, fell well below the threshold for economic contraction of 50. The closely-watched manufacturing purchasing managers survey had risen to 48.6 in November, and economists had expected it to rise to 48.9 last month.

Worries spread around the world, with both Japan's Nikkei 225 and Germany's DAX falling 3 per cent, against a backdrop of continuing anxiety over U.S. interest rate hikes.

"It is ugly out there today and you have to be careful and the fact is that the recent hawkish tone by the Fed over in the US is making investors more nervous," Naeem Aslam, chief market analyst at AvaTrade, wrote Monday.

In China, investors are also worried about Beijing halting the tens of billions of dollars in spending it used to prop up markets in 2015. On July 8, with stocks plunging, Chinese authorities barred major shareholders from selling for six months in hopes of engineering stability.

A broad government-led intervention – which included numerous other measures, and tens of billions of dollars in spending – underpinned a Chinese market rebound through the close of 2015.

But the selling prohibition period will soon end, raising fears of a selloff by large investors.

"Chinese stock prices are in for a rough ride for the next few months, I think that's very clear, as the government gradually takes off the remaining life support," said Arthur Kroeber managing director of independent global economic research firm GaveKal Dragonomics.

"To some degree, the prices established in the second half of last year were false prices, because they were not based on people buying and trading shares in the normal way. And if the government support retreats, the false price falls away and the true price arrives – and no one knows what that is."

In the long run, he said, Beijing's desire to pull back should lead to better markets. Reforms to IPO requirements could be passed as early as this spring and are expected to reduce political influence and allow more private companies to enter the stock market, making it more representative of the broader economy.

Even the use of a circuit-breaker provides a more transparent form of intervention than the briefly-worded government announcements used to declare market interventions in the the past year.

Yet in China, the circuit-breaker was blamed for causing more panic. Investors quickly resumed selling Monday after an initial 15-minute market pause triggered by a 5 per cent drop in the CSI 300.

In a market dominated by mom-and-pop shareholders, investors panicked at the thought of being shut out of a suspended market. Their response: a race to the exits. "You try to sell your holdings first, before the others. So that actually makes the situation worse," said Kenny Wen, wealth management strategist at Sun Hung Kai Financial in Hong Kong.

That led to the full market shutdown when the CSI 300 dropped 7 per cent.

Mr. Wen believes Monday's selloff presages a better year ahead, saying current share prices reflect worse-case economic expectations, and any better data will spark a turnaround. He believes China will lower rates twice and trim reserve ratio requirements four times in 2016.

"We know the economy is slowing down, we know corporate earnings are not very good, but the market is currently very bearish," he said. Sun Hung Kai expects the Shanghai index to hit 4,200 this year, a level it exceeded for nearly two months in the spring of 2015.

Still, many Chinese observers took a bleak view of the Monday trading halt, and the use of a circuit breaker on its first day. That contrasted with similar U.S. mechanisms that have been used little more than once a decade since their installation after the Black Monday losses in 1987.

For the Chinese markets, which are normally volatile, "issuing such a mechanism is as useless as painting a snake's foot," wrote Dan Bin, chairman of Shenzhen Ebay-Invest Co. Ltd., on the Sina Weibo social media platform.

Another user by the name of Chuanmei Lao Xu posted a sarcastic "warm congratulations to the Chinese stock market's biggest online game – the circuit breaker, creator: China Securities Regulatory Commission, Jan. 4, 2016, successfully conducted its first public test!"

With reporting by Yu Mei

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