China’s stocks nosedive as stamp tax increases

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“All the King’s horses and all the King’s men, couldn’t put Humpty together again.” The stock bubble has burst! Or has it really? Stocks crashed down from their soaring highs yesterday in Shanghai and Shenzhen, creating a fallout effect across most of Asia after China moved to triple the tax on stock trading. The increase was an effort to reign in the soaring stock market as everyone from Alan Greenspan to Shanghai taxi drivers has warned about the growing stock market bubble.

David Barboza and Keith Bradsher of the International Herald Tribune:

Investors reacted by selling shares and pushing the two major stock exchanges sharply lower. The Shanghai Composite Index plunged 6.5 percent to close at 4,053.09. The Shenzhen Composite Index dropped 7.2 percent to close at 1,199.45.

When Chinese shares fell sharply in February, markets around the world tumbled in tandem on worries of broader troubles for the nation’s economy. But shares in other parts of Asia fell only modestly Wednesday. Hong Kong’s Hang Seng Index dipped nine-tenths of a percent, and the Nikkei Index in Tokyo slid about half a percent.

It seems that investors across the world are finally waking up to the fact that the Chinese markets are overvalued, and short-term corrections were inevitable. Yesterday’s plunge will most likely turn out to be a brief pause in a very bullish market and the index will no doubt rebound within days. But the increased stamp duty may force investors to play a little safer.

The Ministry of Finance increased the stamp duties on share trades to 0.3 percent from 0.1 percent yesterday, a move aimed to “promote the healthy development of the securities market,” according to an announcement on the ministry’s website. The new regulation won’t affect the many small investors in the market according to Xinhua.

Many small investors are likely to continue their stock market forays despite disillusionment among a few over the tripling of the stamp tax on trading that prompted the sharpest dive in three months on Wednesday.

“The expected fall is a good opportunity to buy more,” said Mrs Guo, 67, who arrived at a branch of Guoxin Securities in Beijing one hour ahead of the opening time of the stock market at 9:30 a.m..

What Xinhua fails to mention of course is the that the majority of trading occurring on the Shanghai and Shenzhen exchanges is not initiated by the likes of Mrs. Guo. While short term trading may be affected, investors will likely begin to look at long term investment strategies. 

1 thought on “China’s stocks nosedive as stamp tax increases

    adam livermore says:

    Speculation fever is intense in China at the moment, especially relating to stocks and real estate. Buying stocks / funds is a staple topic of discussion between office workers at lunchtime. Banks throng with people not looking to save but to purchase equity. My office “ayi” has bought four apartments in the last few years (from where the money came I know not). “touzifang” she calls them (investment apartments).

    There are two things in particular that worry me about this trend:

    1. The people making these “investments” seem to be using all their savings, and more. People close to retirement with no fundamental understanding of the risks of investment are over-committing themselves. Like Japan in the 1980s, Chinese people are believing the sustainability of the economic miracle. There is a serious lack of education from the government concerning the potential consequences for these amateur speculators.

    2. Levels of accounting for companies listed on the stock exchange in Shanghai remain woefully inadequate, and the majority stakeholder in most of these companies remains the Chinese State. Investors have little information about the companies they are investing in, and virtually no control over the management. The surging stock market is built on a weak foundation, and over-reliant on government decree.

    3. Similarly levels of transparency in the real estate sector remain low. Pieces of land are being sold by the government, well, piecemeal, with no apparent overall strategy. The government controls supply of new land and therefore effectively has a high degree of control over the per sqm prices. Apartments where I live that are trading for over 1,000,000 RMB are being leased out at about 40,000 RMB per year. Rents are tied to wages (a reality for the working Chinese), whereas apartment prices are tied to expectations of huge capital gains in the future. Something has to give here.

    To sum up, the high expectations of the Chinese people are driving them to over-commit themselves financially to investments in assets that are over-reliant on government control and that are woefully short of transparency. When things go wrong lots of people will lose their shirts. This will be a personal tragedy for those concerned of course, but perhaps even more importantly their anger will be targeted at the government. This will likely become more of a destabilizing force in China than the current rumblings of discontent from the effectively disenfranchised rural population.

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