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China taps brakes on red-hot stock market

The government sends a message by tripling stock trades' stamp tax.

Associated Press
Published May 31, 2007


BEIJING - Alan Greenspan, the former Federal Reserve chairman, pronounced last week that the meteoric rise of China's stock market is unsustainable.

But China's leaders may have found a way to control it, at least for now.

Effective Wednesday, they tripled the "stamp tax" on stock trades to 0.3 percent from 0.1 percent. In response, the main Shanghai Composite Index tumbled 6.5 percent to 4, 071.27 Wednesday after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1, 199.45.

The decline in Chinese shares hit other markets, too, although not as dramatically as on Feb. 27, when investors around the world flinched from a nearly 9 percent slide in the Shanghai index.

Despite the drop Wednesday, Shanghai's benchmark index is still up 52 percent for the year, following a 130 percent jump in 2006.

"This policy change reveals the government's concern about a possible stock market bubble, " said Citigroup economist Minggao Shen, describing the tax hike as Beijing's first formal move to cool the boom. "The market didn't know what the government was thinking until now."

The gains have been fueled by strong corporate profits and a flood of fresh money from millions of new investors sinking their savings into the stock market amid a scarcity of other investment options. Chinese banks pay just 3 percent interest on deposits.

The number of Chinese stock-trading accounts has risen to about 100-million, with tens of thousands being opened every day. The press has reported on first-time investors mortgaging their homes or dipping into retirement savings to play the market.

Government officials and financial analysts have expressed concern that some novices are making risky investments, creating a possible bubble in prices.

Wednesday's drop modestly affected regional stock markets, with Tokyo's benchmark index slipping 0.5 percent and Hong Kong's market closing down 0.9 percent. South Korean shares inched up to a record.

The effects of the pullback in China's markets are somewhat limited to domestic investors as the country limits foreign investment in certain areas. While it has eased restrictions, the government controls how many foreigners can buy the mainstream, yuan-denominated stocks. Known as "A shares, " these stocks account for the largest slice of the markets. There are also foreign currency-denominated "B shares." The benchmark Shanghai Composite Index tracks both A and B shares.

The stamp-tax increase "is an early move, so that even if the markets correct soon, they still have time to stabilize or even improve before the party meeting in the fall, " Shen said.

Economists say a fall in the markets should have little impact on China's economy, because growth is driven by exports.

Fast Facts:

 

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