24 April 2008

FT: China slashes tax on share trading

China slashed the tax on share trading last night in an effort to encourage investors to return to a stock market that has fallen by nearly half over the past six months.

The government will reduce the tax on each share trade from 0.3 per cent to 0.1 per cent from this morning, state television reported last night.

The announcement effectively reversed a decision last May when the government tripled the tax. This was in an effort to limit speculation as retail investment was expanding rapidly and many observers believed the market was developing into a bubble.

“This is a very useful measure and will definitely boost confidence, which is exactly what the market needs at this moment,” said Peng Yunliang, analyst from Shanghai Securities. “However, this will only be effective in the short-term.”

The Shanghai composite index fell from 6,124 points in October to below 3,278 on Wednesday. Despite the slump, the benchmark index has still risen threefold since late 2005.

Although there have been few signs of the sort of large public protests by angry investors that accompanied previous market crashes, the government has come under increasing pressure to take steps to boost the market.

China’s stock market has witnessed a surge of interest from retail investors over the past year.

Moreover, state-owned entities own large holdings of listed companies, further increasing the pressure on regulators to prevent extended losses.

The tax cut is likely to boost the market in the short-term but the decision reinforces the perception on the mainland that the authorities have a big influence over the direction of share prices. “The government’s continued efforts to manage the level of prices condemn equity markets to further volatility,” said Mark Williams at Capital Economics in London.

Moreover, a sustained revival will require investors to overcome fears about rising inflation, slowing earnings growth from listed companies and a big potential supply of new shares coming on to the market.

The increase in the tax and the boom in share trading last year gave the government a huge windfall in revenues of Rmb182bn ($26.1bn), equal to nearly half the defence budget. The government revealed last month that the trading tax raised Rmb200.5bn in 2007, up from Rmb17.9bn in 2006.

Despite the surge in interest, many analysts believe equity culture is still relatively shallow in China. According to Andy Rothman at CLSA in Shanghai, the tradeable market capitalisation in China was equivalent to 36 per cent of GDP at the peak, compared to 109 per cent in Japan, while public participation in the market remains limited.

By Geoff Dyer

© Financial Times