CHINA FINDS ACTION BETTER THAN WORDS By Jamil Anderlini in Hong Kong
Tuesday, June 05, 2007
The days when the Chinese government could control the level of the stock market with a well-placed editorial or two are well and truly gone.
China's three main state-controlled securities papers ran prominent articles yesterday, reassuring investors on the health of the market and predicting prices would stabilise after last week's panic selling and a flight to higher-quality stocks.
The message fell on deaf ears. Heavy selling continued and the market dropped 8.3 per cent, the biggest one-day fall since the benchmark Shanghai Composite Index lost 9 per cent and was blamed for spooking markets from New York to Mumbai at the end of February.
It was very different in 1996, when the authority managed to cool a rapidly surging stock market with an editorial in the People's Daily about the dangers of speculation.
What triggered this latest correction was the government's decision to raise the stamp tax on Wednesday.
The move sent the SCI down 6.5 per cent that day and was clearly aimed at slowing a bull market that had seen the index more than quadruple in less than two years.
The tax rise came a week after the government denied rumours of the impending tax increase, which caused an uproar among retail investors, who complained they were being misled and were left holding the bag when the market fell.
Hu Xiaodong, a senior investment manager at MC China, a subsidiary of Martin Currie Investment Management, said: “Many investors have entered the market for the very first time recently and they learnt their first lesson last week when the government did what it said it wasn't going to.
“Raising the stamp tax was a relatively minor move but it had a huge psychological effect and investors decided to secure their profits rather than wait for new government measures.”
The sell-off could be exacerbated as mutual funds dump their holdings to meet redemption demands from punters who treat them more like speculative stocks than long-term investments.
One regulatory source, who asked not to be named, said: “In the long term investors are still confident about the market but in the short term it will be volatile because the government's policies are very unpredictable.
“The government does not want to bring the market down, but rather to keep it stable and not rising too quickly, so I think it will be much more careful about introducing new measures.”
Government officials made it clear yesterday that the decision to introduce the new stamp tax was made at the highest level of the communist party before being announced by the Ministry of Finance, which is responsible for tax collection.China's securities regulator, the China Securities Regulatory Commission, did not make the final decision to introduce the tax. It has tried to transform itself in recent years into more of a market-oriented regulator that sets the rules but does not intervene directly in the market.
The decision over the stamp duty could have surprised a few officials who see the central government meddling in the stock market as a step backward.
The communist party may not be able to talk the market up or down as it once could but, as one regulator said it remains true that “in China you must pay attention to politics even if you are more interested in the economy.”
