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Tax cut propels China stocks to biggest gain since late 2001
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15:58, April 24, 2008

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The overnight announcement of a cut in share trading taxes drove Chinese stocks 9.29 percent higher in soaring turnover on Thursday, with the key Shanghai Composite Index up 304 points to 3,583.03, the largest gain since Oct. 23, 2001, when daily limits were introduced.

The policy change, which slashed the stamp tax from 0.3 percent to 0.1 percent effective immediately, was announced two days after the benchmark index had fallen to half its peak of October 2007.

The Shenzhen Component Index jumped 9.59 percent to 12,914.76 points.

Combined turnover hit 263 billion yuan (37.57 billion U.S. dollars), twice that of Wednesday. In Shanghai, volume was 191.7 billion yuan, the most since the beginning of this year.

Turnover on the two bourses swiftly reached some 123.48 billion yuan in the first hour of trading on Thursday, a record high.

Only two stocks fell, and more than 1,000 rose by the 10-percent daily limit.

The long-awaited tax cut is a clear signal of the government's determination to bolster the fragile market, said Wang Junqing, analyst with Guosen Securities. Market sentiment was likely to recover with lower transaction costs, he said.

The tax cut was the most aggressive move thus far of several measures. On April 20, regulators announced curbs on the sale of non-tradable shares that come out of lock-up periods.

The move will address concerns over a flood of shares coming into the secondary market, which could "put constant pressure on stock prices and distort the price formation mechanism," the China Securities Regulatory Commission said.

The Shanghai index rose 4.15 percent to 3,278.33 on Wednesday, ahead of the tax cut announcement, but was still down 37.7 percent this year and 46 percent from its peak on Oct.16.

"The market has seen the bubbles removed and is worth investing in at current price levels, while scope for future rebounds will depend upon macro-economic performance," said Galaxy Securities analyst Li Feng.

Meanwhile, analysts said investors should remain cool-headed and risk-averse amid drastic fluctuations.

"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 said, warning that policy adjustments might make the market more volatile.

Stamp tax adjustments have never acted as a turning point for the stock market, Gaohua Securities said in a report. Such moves pushed up the index in the short term, but history suggested that they failed to reverse downtrends.

The tax cut, while welcome, won't eliminate the market's problems. The prolonged downtrend would not be completely reversed unless inflationary pressures eased and housing prices stabilized, Wang said,

Inflation soared to 11-year high of 8.7 percent in February after the worst snow storms in half a century.

To help cap inflationary pressure, the government froze energy prices in January, prompting mounting fears for listed companies' earnings growth.

On Thursday, more than half of the 20 largest-capitalized shares rose by the daily limit of 10 percent, including Sinopec, the country's biggest refiner; China Life, the biggest life insurer, and steel maker Baosteel.

Brokerage shares led the leap, as people believe the trading income will greatly benefit from the rebound. Citic Securities, the country's biggest brokerage soared 10 percent to 32.13 yuan.

The stock market was still immature in many ways and required urgent improvements in transparency, efficiency and proper operation, said an executive meeting of the State Council, presided over by Premier Wen Jiabao on Wednesday.

Stock prices have fallen sharply since October, ending a boom that began in mid-2006. The main index has dropped by nearly half, hitting levels last seen in March 2007.

Intense debate began early this month on whether the government should take steps to improve sentiment. The stamp cut was one of the subjects of the debate. After the tax was tripled last May in an attempt to rein in the market, 59.7 billion yuan in stamp tax revenue was collected for all of 2007. That compared with 17.9 billion collected in 2006.

Source:Xinhua



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