China Stocks Drop; Does It Matter?

Filed in archive Stocks on May 30, 2007

Probably not. That at least seems to be the consensus so far.

In a move designed to cool China's red hot stock markets the Chinese Ministry of Finance today tripled the stamp tax on the trading of securities. That takes the tax on buying stock from one-tenth of one percent (0.1%) to three-tenths of one percent (0.3%). Is that likely to make much difference?

One news source, Interfax, put it this way: "An additional 0.2% tax is absolutely meaningless insofar as a cooling measure is concerned, given that stocks often move by 5% or more in a day." Interfax said that the move would result in profit taking - a short term sell off after which markets would continue to climb.

As a result of the increased stamp tax on the sale of stock in China, the Shenzhen Composite Index fell 7.2%. The Shanghai Composite dropped 6.8% today; that same index fell over 9% on February 27 as a result of a government crackdown on the practice of buying stocks with borrowed money. But even after that large decline just three months ago, the stocks in Shanghai were at a record high just yesterday - and it was the eleventh record high in Shanghai this month.

So waht we have is a situation where the Chinese government tried to tame the beast and to cool off the Shanghai market just three months ago. They saw a 9.5% drop then. But with the effect of that effort having disappeared complete, the Chinese government took a second shot at it - and got less for their efforts...

Maybe stocks in Shanghai will fall more tomorrow. But the bubble has not burst yet.