Markets shrug off Shanghai tumble By Geoff Dyer in Shanghai
Thursday, May 31, 2007
World financial markets largely shrugged off yesterday a sharp tumble in the red-hot Chinese stock market.
The 6.5 per cent sell-off in Shanghai shares barely triggered a passing tremor with investor risk appetite still buoyed by ongoing mergers and acquisition activity, high levels of liquidity on markets and perceptions of a largely benign economic environment. The resilience was in sharp contrast to nervousness in February when a similar drop in the Chinese stock market helped to spark a bout of financial turmoil around the globe.
This time contagion was limited as investors took the view that a deflating of China's stock market was unlikely to have international repercussions or even derail the booming Chinese economy. Most leading stock markets suffered only modest falls at worst and there was limited evidence of rising risk aversion in currency markets.
The latest Shanghai sell-off was sparked by China's most decisive step yet in its efforts to cool the mainland stock market by tripling stamp duty on share transactions.
The decision to increase stamp duty from 0.1 per cent to 0.3 per cent broke a remarkable rally that has seen mainland share prices increase by nearly 60 per cent this year, on top of a 130 per cent rise last year.
The tax increase is part of a delicate balancing act Beijing faces over the stock market. The authorities want to limit the amount of speculation in the market, yet they also want to avoid a dramatic drop in share prices which would result in hundreds of thousands of new retail investors facing large losses.
The mainland markets saw record turnover yesterday as nervous retail investors sold stocks. But in spite of the sharp drop, most analysts do not expect the tax increase to have a significant impact on the market and predict that other measures will follow if retail investors continue to put new money into equities.
”We believe this adjustment is mainly temporary. It could be shorter than a week,” said Li Xianming, analyst at Ping An Securities in Shenzhen.
Although many Asian markets fell on the back of the China news, the international impact was much smaller than in late February when the Shanghai market lost 9 per cent in one day.
Charles Dumas at Lombard Street Research, added: “China is a self-contained issue . . . It's not going to cause contagion in any normal sense of the word.”
In its quarterly report on the Chinese economy published yesterday, the World Bank said: “The authorities can be agnostic about the level of the stock market.” However, the bank warned that a sharp fall could delay reform of the financial system and would lead to calls for specific groups to be bailed out.
