International | May 30 2007
By Rudi Filapek-Vandyck
Chinese shares have lost more than six percent on Wednesday morning after the authorities announced a hike in stamp tax on stock trading the previous night.
The benchmark Shanghai Composite Index lost 6.08% to 4,071.27 points at the end of morning trading after opening 5.78% lower.
According to local reporters, shares of equity brokerages were hardest hit due to concerns that the tax hike would lead to decreased market turnover which in turn will affect brokerage revenue. CITIC Securities and Hong Yuan Securities both opened down their 10% daily limit.
The Chinese Ministry of Finance announced Tuesday night the stamp tax on stock trading will rise to 0.3% from 0.1% starting from Wednesday, in what is widely seen as the authorities’ latest attempt to cool down the country’s runaway equity market.
Local market watchers were quick on their feet to dampen any worries about a pending crash, as a tripling of the stamp tax may sound scary at first, but in the greater scheme of things we’re only talking about a levy of 0.3%.
Some analysts nevertheless believe the tax hike could dampen the market in the short term, especially the more speculative-oriented trading activity.
It has to be noted that history suggests a close relationship between higher stamp duties and retreats for the Chinese stock market.
China started to collect a stamp tax on the Shenzhen Stock Exchange in July of 1990, but only on sellers at 0.6%. Four months later, the buyers were also included to the tax.
At the time the introduction of the tax triggered a downturn in the Shenzhen market, forcing authorities to cut it in half to 0.3% in October 1991. At that time, the Shanghai Stock Exchange also began collecting duty on both sides of trades.
On May 10, 1997, the tax rate was raised to 0.5% and was later partly blamed for a bear market that lasted until mid-1999. The rate was lowered to 0.4% in June of 1998 before being lowered again to 0.3% one year later and again to 0.2% in 2001.
In January 2005 the tax was further lowered to 0.1%. At that time the Chinese share market had been caught in a multi-year market slump lasting from 2001 to 2005, suggesting some correlation with tax levies.
Taken from this point of view lowering the tax to 0.1% may well have initiated the current bull market.
