In May of 2007 China acted to curb the stock market by tripling stamp tax on stock trading.

A ministry official said the measure is intended to help promote the healthy development of the securities markets. Ha Jiming, chief economist of China International Capital Corporation said the hike will increase investors’ transaction costs and is expected to curb short-term speculative activities. But the influence on long-term investment is limited.

“The hike will neither reverse the upward trend of the stock market, nor lead to consistent downfalls,” he said. Ha added the hike was good news for the long-term healthy development of China’s capital market.

He Qiang of Central University of Finance and Economics deemed the new policy’s influence largely “psychological”.

Reverse Psychology

After the near 50% decline from the top and a 35% decline this year, China Cuts Tax on Share Trading to Bolster Markets.

China cut the tax on share trading to support stocks after a 35 percent plunge in the benchmark index, the world’s second-worst performing this year. Stamp duty charged on stock trades will be lowered to 0.1 percent from 0.3 percent effective tomorrow, the government said in a statement on its Web site after the close of trading today. “The market will bottom out,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “It’s a clear signal from the government that it thinks of the decline as overdone.”

So far, measures to boost stocks have failed to stem the decline. The government said on the weekend shareholders selling more than 1 percent of a stock within a month must do so in single trades, keeping the transactions off the open market to support equity valuations. The Shanghai Composite Index, which tracks the larger of China’s two stock markets, dropped to 50 percent below its October record yesterday.

China’s stocks remain the most expensive relative to earnings among markets in Asia tracked by Bloomberg. The CSI 300 is valued at 26 times reported earnings, compared with 16 times for Japan’s Nikkei-225 Stock Average and 15 times for Hong Kong’s Hang Seng Index. The S&P; 500 Index is trading at 22 times earnings.

Shanghai Composite Index – Daily

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Shanghai Composite Index – Weekly

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FXI – China 25 – Daily

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FXI – China 25 – Weekly

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The Chinese stock market could be in for a rebound, led by FXI and other selective issues. If so, it will not happen because of the stamp tax, it will happen because the market was ready for a rebound.

After all, a 50% drop is quite a drop and the rebound is right where one might have expected it, on the Shanghai Composite Index weekly 200EMA. The irony is the index is not that far from where China initially acted curb enthusiasm.

Mike “Mish” Shedlock
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