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China Triples Share Tax To Cool Stock Market

by Mary Swire,, Hong Kong

31 May 2007

The Chinese government has announced a tripling of the stamp duty tax charged on share dealings, in a bid to take some of the speculative excess out of the country's stock markets.

The stamp tax was increased to 0.3% from 0.1% after a surprise announcement by the Ministry of Finance shortly after midnight US time on Tuesday. However, the government stopped short of restoring the stamp tax to its 1997 level of 0.5%, imposed the last time it attempted to cool the market, fearing a loss of confidence among traders and investors.

According to the official Xinhua news agency, a ministry official said that the share tax hike was "intended to help promote the healthy development of the securities markets".

Following a long period of stagnation, when the government actively encouraged more investment in the stock market, the value of shares traded in China has soared over the last eighteen months, with prices increasing 60% this year, on top of 130% last year. This rally has recently been underpinned by millions of ordinary Chinese investors putting their savings into equities. According to the New York Times, small investors have been opening brokerage accounts at the rate of 300,000 for the past two weeks, with 455,111 accounts opened on Monday alone. The number of share trading accounts in mainland China broke the 100 million barrier earlier this week.

While the tax hike has had the desired effect of deflating prices, analysts are tending to think that share prices will probably recover and continue to trend upwards. However, with many investors fearing that a correction the Chinese stock market is long overdue, the spectre of a sell-off and a market crash, which would wipe billions of dollars off the value of small investors' savings, continues to haunt the government.

“The grand strategy is to gradually deflate the bubble but not to prick the bubble,” Steven Sun, analyst at HSBC in Hong Kong, told the Financial Times.

If the rally continues, Beijing may be forced to consider other fiscal measures to put a brake on the market, such as further increases in stamp duty, or the imposition of capital gains tax on share profits, although this latter measure is being touted as a last resort.

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