(China Daily)
Updated: 2007-06-04 06:49

Battered by the increased tax on trading, the Chinese stock market has reached a crossroad after diving by about 6 percent in three trading days.

Both analysts and investors are no longer as sure as they were when the market kept hitting record highs in recent months.

Their wavering confidence comes primarily from the unexpected government move on Wednesday, tripling the stamp tax to 0.3 percent. Some frustrated investors have taken it as the start of a series of government control measures that will generate ongoing market declines.

In fact, the government move aims to cool excessive heat. Red-hot trading brings nothing but unaffordable risks to the market, and the stamp tax was increased to bring trading within a reasonable range.

The State is not willing - and cannot afford - to trigger a sharp market decline that would damage all investors.

The market has risen so strongly not only because of speculation-driven bubbles but because of China's sound economic fundamentals. The Chinese economy has grown at a double-digit rate in recent years with few signs of a slowdown.

As a growing number of blue chip companies - the backbone of the national economy - list on the domestic market, the national economy will continue to develop quality companies, capital and vitality for the stock market.

The 2005 share-merger reform of State-owned companies brought their non-traded shares into the market. The reform broke the barrier to long-term growth of what had been a distorted market. Floating all shares has increased investor involvement and pushed listed companies to improve corporate governance.

International excess liquidity, part of which is entering China, coupled with increasing bank deposits and limited investment channels, has stoked the fire in the Chinese stock market.

A tax adjustment will not change these fundamentals.

Regulators' paramount responsibility is an orderly market free from manipulation. It is in individual investors' best interest to adopt a value-based long-term strategy, one that can ignore losses from short-term corrections while profiting handsomely in the long-term as China's market matures.

(China Daily 06/04/2007 page4)