Chinese Government Intervention Sends Shanghai Stocks Soaring

By: Jason_Simpkins

Stock prices soared in China yesterday (Thursday) after the government announced Wednesday night that a tax on stock trades would be reduced. Beijing's decision to lower the trade tax from 0.3% to 0.1% was motivated by a steep drop in many mainland indices over the past six months.

The Shanghai Composite Index rocketed 9.3% Thursday, to close at 3,583.03, after rising 4.15% prior to the announcement. Before the rally fears over inflation and a downturn in global growth sent the index diving 40% this year, and by as much as 50% from its Oct. 16 peak.

The first three months of 2008 amounted to the worst quarter ever for the benchmark index, but yesterday's gain was the largest single day increase in more than seven years.

The Shenzhen Component Index jumped 9.59% to 12,914.76. And in Hong Kong the Hang Seng index gained 1.5%, even though the Hong Kong market is not subject to Beijing's regulation.

"The stamp tax cut is a political signal that the government is taking actions to save the stock market," Qian Qimin, an analyst in Shanghai for Shenyin & Wanguo Securities told the International Herald Tribune . "This lowers trading costs and stimulates trading activity. And what is more important is the political meaning, that the government is paying attention to the capital market and won't stand by and let it sink."

Many analysts anticipated a sharp downturn this year because of the radical gains that characterized the Chinese market throughout 2006 and 2007. Drastic gains stirred up investor frenzy in the Asian nation inflating stock values beyond what might be considered a reasonable market value.

While reducing the tax may have reignited investor confidence, it did nothing to improve market fundamentals and analysts warn that policy adjustments could make the market even more volatile.

"Investors need to take a sensible attitude as the [tax cut] policy was actually aimed at adjusting the psychology of investors," Guosen Securities analyst Lin Songli told Xinhua , China's official news agency.

Beijing's market manipulations could also backfire. The government walks a fine line between letting the market operate on its own and intervening to shelter the populace - and the economy - from extreme fluctuations.

Last May, when Beijing suddenly tripled the stock-trading tax, the Shanghai market tumbled and angry investors chided the government for raining on their parade. But today, investors applaud the government's intervention and wonder what took so long.

"The government should have saved the market because it is mainly small and individual investors who suffered. We don't have the information that many institutional investors have," Chinese citizen, Liu Rongsheng, told the Los Angeles Times .

News and Related Story Links:

• International Herald Tribune: Stocks soar in China as taxes on trades are cut

• L.A. Times: Stock market rallies in China

By Jason Simpkins
Associate Editor
Money Morning/The Money Map Report

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