SHANGHAI: The increase in stamp tax triggered a selling spree on the Chinese stock market yesterday as investors were trying to double guess the government's next move to prick the asset bubble before it gets out of hand.

The Shanghai Composite Index closed at 4,053.09 after diving 281.84 points, or 6.5 percent, the biggest one-day plunge since a major correction in February, amid hectic trading.

The turnover on the Shanghai bourse totalled 271.29 billion yuan ($35 billion), a new record, with 797 out of 897 stocks closing lower.

The main indicator opened nearly 6 percent down, but quickly regained some ground in early trading. Heavy selling set in when the index crept back up to the 4,300 level in mid-morning, pushing the index to its lowest level of the day in early afternoon to 4,015.51 before recovering a little at the close.

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The smaller Shenzhen Composite Index plunged 7.19 percent to close at 1,199.45, while the foreign-currency dominated B-share index plummeted 9.01 percent to close at 302.95.

Economists and analysts said the tripling of the stamp tax from 0.1 percent to 0.3 percent effective yesterday - intended to help promote healthy growth in the securities market - would continue to depress the market in the short term.

But they agreed that such a move alone would not be strong enough to reverse the longer-term market up-trend.

Investors, they said, were obviously more worried about possible follow-up fiscal action by the government than a rise in stamp tax.

"Continuously rising share prices have finally attracted the first government intervention since last year. It indicates that the authorities have started to worry about a stock market bubble, and other measures are likely to follow if needed," Shen Minggao, an economist at Citigroup said yesterday in his research report.

"The psychological impact on investors could be larger than the actual effect of the tax adjustment. We think the policy change may add pressure on share prices in the near term, which could reduce the risk of a market crash, " he added.

"If this measure does not cool down the market, the next step for the government to take is to increase initial public offerings (IPOs)," said Cheng Dinghua, an analyst at Essence Securities. According to Chen, around 400 billion yuan ($52.21 billion) worth of IPOs are expected, including red-chip shares and H shares returning to list on the mainland in the next six months.

Ding Jianping, a professor of finance at Shanghai University of Finance and Economics, agreed and said the stamp tax, which directly targets speculators, would discourage fast churning of shares by raising the cost of each transaction.

Zhang Yidong of Industrial Securities said that the rise of stamp tax lowered the expectations of the introduction of a capital gains tax, which could have a much larger negative impact on the stock market.

"The securities companies will receive a big jolt because of the expected decrease of stock trading, which directly lowers brokerages' income," said Wang Xiaodong, an analyst at Guotai Junan Securities.

All securities companies listed on the Shanghai bourse tumbled to the daily allowable limits in yesterday's trading. Citic Securities fell 10 percent to close at 57.6 yuan, while Hongyuan Securities closed at 35.01 yuan.

Other stocks in the financial sector followed suit. Ping An of China dropped 9.25 percent to close at 58.97 yuan while Bank of China was down 7.29 percent to close at 5.47 yuan.

However, yesterday's fall did not appear to trigger sell-offs in regional or European bourses like in February, mainly because a correction was widely expected, analysts said.

The Chinese government collected 12.2 billion yuan ($1.59 billion) in stamp tax on stock transaction in the first quarter this year, up 515.9 percent from last year.

The stamp duty started in the early 1990s at 0.6 percent, and was reduced gradually to 0.2 percent in 2001. The government further lowered the duty to 0.1 percent in 2005 to encourage share trading.

(China Daily 05/31/2007 page1)