China's Latest Market Cooling Effort

♠ Posted by Emmanuel in ,, at 5/30/2007 04:39:00 AM
With a price-to-earnings ratio of 48, valuations of Chinese stocks are becoming more unrealistic than reality show TV. With that in mind, the government has tried various measures to curb speculation such as raising interest rates and reserve requirements, to no avail so far. Its latest effort involves raising taxes on stock transactions threefold:
China's stocks dropped from a record after the government tripled the tax on securities transactions, halting a rally that's made the shares Asia's most expensive.

The CSI 300 Index fell 110.61, or 2.7 percent, to 4057.68 as of 10:30 a.m. in Shanghai, after initially tumbling as much as 6.3 percent. The measure has almost doubled this year, the best performance of 90 global benchmarks tracked by Bloomberg, as an influx of new investors stoked demand. China's brokerage accounts this week topped 100 million for the first time, according to the China Securities Depository & Clearing Corp.

Stamp duty on share trades has been increased to 0.3 percent, effective today, ``to promote the healthy development of the securities market,'' the finance ministry said on its Web site. The central bank this month raised interest rates for the second time this year, encouraging people to save rather than invest in stocks, and brokerages were ordered to make investors sign a declaration acknowledging risks when opening accounts.

``The government is doing something real to curb speculation and prevent the market from overheating,'' said Li Xuewen, who manages about $284 million at Invesco Great Wall Fund Management Co. in Shenzhen. ``If the market doesn't cool down, more measures to stem the gains will probably follow.''

Based on yesterday's closing price of 64 yuan, investors now have to pay 192 yuan ($25.1) in tax when buying or selling 1,000 share of Citic Securities Co., up from 64 yuan before the increase. Citic Securities, the nation's biggest publicly traded brokerage, has the biggest representation in the CSI 300.

A record 455,111 accounts to trade mainland shares and mutual funds were opened on May 28, China Securities Depository & Clearing said yesterday. More than 20 million accounts have been opened at brokerages so far this year, four times the amount in all of 2006, according to the clearing house.

So far today, this effort actually seems to be working as Chinese stocks are going down like a Led Zeppelin [you need coolin', baby I'm not foolin'!]:

Chinese stocks plummet more than six percent on Wednesday after an announcement of a hike in stamp tax on stock trading.

The benchmark Shanghai Composite Index has lost 6.08 percent to 4,071.27 points at the end of morning trading after opening 5.78 percent lower.

The Ministry of Finance announced Tuesday night the stamp tax on stock trading will rise to 0.3 percent from 0.1 percent starting from Wednesday, in the authorities' latest move to cool down the country's runaway equity market.