Stocks rebound from sharp fall

By Dong Zhixin (
Updated: 2007-05-31 16:31
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Chinese stocks Thursday rebound in volative trade from the second sharpest fall in a decade that was caused by the tripling of stamp tax on stock trading.

The benchmark Shanghai Composite gained 1.40 percent to close at 4,109.65 points after moving between 3,858.04  and 4,178.10, reversing Wednesday's 6.5 percent plunge. The Shanghai and Shenzhen 300 Index rose 1.07 percent to 3,927.95.

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Stocks rebound from sharp fall

China Raises stamp tax

Stocks rebound from sharp fall

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T he recovery was largely driven by blue chip stocks as some investors thought a lesson should be learned from Wednesday's fall was they should invest in blue chips to hold them for months or even years, instead of trading small, speculative stocks.

Bank stocks staged strong performances, with Pudong Development Bank being the biggest gainer, jumping to its daily limit of 10 percent to close at 33.76 yuan per share. Huaxia Bank soared 8.27 percent to 13.09 yuan, followed by China Merchants Bank which surged 8.22 percent to 21.72 yuan.

The Industrial and Commercial Bank of China rose 3.01 percent to 5.48 yuan, while Bank of China went up 4.56 percent to 5.73 yuan.

Sinopec was also strong. It jumped its 10 percent daily limit to 14.85 yuan after gaining more than two percent on Wednesday.

However, only 343 out of more than 1,400 stocks in the Shanghai and Shenzhen Stock Exchanges posted gains as investors remained jittery about potential further moves by the government to cool down the market.

On Tuesday night, the Ministry of Finance announced the stamp tax on stock trading will be raised to 0.3 percent to 0.1 percent, prompting the second sharpest fall in a decade. The biggest fall happened on February 27 when the Shanghai Composite Index nosedived nearly nine percent, which was partly blamed for a global sell-off.

The real impact of the duty hike is on the market sentiment, said Tao Dong, chief China economist of Credit Suisse First Boston. "Actually what the market cares now is not the change in stamp tax, but the further tightening measures the government might take."

Tao Dong believed the duty increase is just one measure in the government's tool box to cool down the market. "More measures are likely to follow," he said.

Deutsche Bank chief China economist Ma Jun echoed Tao's points, but he thought whether regulators will take more actions depend on the development of the market in the days, or weeks ahead.

"If the market pulls back 15-20 percent, which is what the government would like to see, then maybe there will be no more harsher policies," Ma said. However, if the market ignores the signal and continues to soar, for example, rising 20 percent in a month, then the stamp tax might be further raised, he said.

There is also a speculation that the government will levy capital gains tax and abolish the interest tax soon, but has been rejected by a State Administration of Taxation official.

"In the short-term, there will be no policy on the levy of capital gains tax or the abolition of interest tax," the official was quoted as saying by Beijing News on Thursday.

However, whether the assurance will be well received by investors remained unknown. The Ministry of Finance denied the rise of stamp tax on May 23, but announced the hike six days later.

Trading was heavy on Thursday, albeit not as active as the previous session. Turnover in the Shanghai Stock Exchange hit 239.52 billion yuan compared with Wednesday's 271.29 billion yuan, while volume in the Shenzhen bourse topped 121.94 billion yuan against 135.84 billion yuan on Wednesday.