Houston Community News >> Chinese Stocks Sharpest Decline in 3 Months

6/4/2007 SHANGHAI- Chinese share prices tumbled 8.26 per cent Monday for the sharpest drop in more than three months on concerns the authorities will take more measures to cool a speculative frenzy, dealers said.

The market was reeling from a decision by the government in the middle of last week to triple stamp duty on stock transactions to 0.3 per cent, and fears persisted about what other steps the authorities might have in store.

“There had been need for a correction and the increase in the stamp duty tax proved to be the straw that broke the camel’s back,” said Deng Hongguang, a Shanghai-based analyst with Orient Securities.

Monday’s massive sell-off was the worst since February 27, when stocks plunged 8.84 per cent in the biggest downturn in a decade and sparked off a round of turmoil on the global equity markets.

While the February drop triggered panic in stock markets around the globe, Monday’s plunge in China shares met with a relatively muted response in Asian markets, with Australia and South Korea reaching new highs.

At the same time, Monday’s losses only take the record-breaking markets back to levels seen in mid-April, leaving plenty of room for further falls if investors prefer safety and so take their profits.

The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, ended down 330.34 points at 3,670.40 after trading between 3,659.09 and 3,987.27. Turnover narrowed very sharply too, at 145.98 billion yuan (19 billion dollars) from 228.35 billion yuan Friday.

The Shanghai A-share Index lost 346.70 points at 3,850.38 on turnover of 143 billion yuan and the Shenzhen A-share Index was down 93.28 points at 1,088.16 on turnover of 72.65 billion yuan.

The yuan ended the day at 7.6503 against US dollar, down from the previous finish of 7.6460. The government announcement of the hike in the stamp duty last week prompted a 6.5 per cent fall in the Shanghai Composite index on Wednesday.

The market clawed back some ground the day after but on Friday rumors of new government cooling measures began to circulate including speculation of a dreaded capital gains tax leading to further losses.

“Prior to the increase in the stamp tax, finance ministry officials had said it would not happen in the short-term,” said Wu Dazhong, a Shenzhen-based analyst with Shenyin Wanguo Securities. “With that experience in fresh memory, investors see denials of an impending capital gains tax as almost a confirmation that it will probably happen.”

Monday morning the government tried to focus investors on longer-term prospects, with three front-page editorials in official securities newspapers reassuring that the long-term uptrend was intact despite the stamp duty hike.

“The adjustment in the stamp tax is just a ripple in the markets and it will not change the positive and stable development trend. The policy has changed but the trend does not,” the Shanghai Securities News said.

“There is no reason not to be optimistic about the mid- and long- term development trend of China’s capital market,” it said in the editorial. Lu Fangxing with Hualin Securities said the editorials signalled that the government did not want to see a sharp fall.

“The slump was beyond regulators’ expectation. The authorities just hope to curb speculative sentiment,” said Lu. “They did not expect the policy would hit the market so hard. I guess they are watching the market even more closely than investors.”

The smaller and very speculative hard-currency B-share markets also suffered heavy losses. The Shanghai B-share Index was down 22.01 points or 7.80 per cent at 260.32 and the Shenzhen B-share Index shed 43.05 points or 6.60 per cent at 609.28.

“I think the first round of correction is over and a rebound could happen Tuesday or Wednesday,” said Bian Fengwei, an analyst with Guodu Securities. “It’s just a matter of how much it will rebound and what kind of stocks will rebound.”

Other analysts were more reluctant to make forecasts amid the growing volatility. “There might be some voices reassuring about the market after the sharp falls but everything is unpredictable now,” said Orient Securities’ Deng.

(Contributed by International News)