By Dong Zhixin (chinadaily.com.cn)
Updated: 2008-04-24 17:05

An investor smiles in front of an electronic board showing stock information at a brokerage house in Tianjin municipality April 24, 2008. China's main stock index soared over 9 percent in frenzied trade on Thursday after the government cut the share trading tax, seeking to boost investors' confidence. [Agencies]

China's stocks skyrocketed more than 9 percent, after the government cut a tax on stock transactions in an effort to boost the slumping mood and bring smiles back to investors' faces.

The stamp tax on stock trading was slashed to 0.1 percent from 0.3 percent starting from Thursday, following a 50 percent plunge in the country's equity market in less than six months.

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After hearing the long-awaited news, investors went on a buying spree, pushing the benchmark Shanghai Composite Index (SCI) to open 7.98 percent higher at 3,539 points. The gauge retreated slightly as investors who bought shares in the past few days unloaded shares to lock in profits.

However, huge buying orders overwhelmed the shorting side to help the SCI close the session 9.29 percent higher at 3,583.03, the biggest gain in more than six years.

Trading volume of the Shanghai and Shenzhen bourses reached over 270 billion yuan,  doubling their average transaction value, indicating a lot of investors are entering the market while many are cashing out.

That showed many institutional investors were selling shares and the market sentiment has yet to stabilize, Guotai Jun’an Securities said in a report. They expect the market to fluctuate between 2,800 and 4,300 points in the second quarter of this year.

Analysts were divided on the real effect of the tax cut. Some called the rebound as a knee-jerk reaction and a short-lived one as concerns over the economy, inflation and corporate earnings remain. Others argue that the move revealed the official stance and is sure to attract more investors back into the game.

Some also expressed worries that the government-orchestrated rebound will lead to another bubble. It may reverse the official efforts to shake off the stigma of a policy market, whereby investors make guesses about potential government moves, rather than study the economic and corporate fundamentals.

The new tax move came after the country's stock market fell nearly 50 percent from its peak since mid-October due to a mixture of factors, including the overvaluation of shares, tight monetary policies, and concerns over the economy and corporate earnings due to a global economic slowdown.

Coupled with the declines was plummeting investor confidence, as evidenced by the lackluster sales of once red-hot investment funds. That prompted more and more financial experts to join the chorus for regulators to act.

At an executive meeting of the State Council chaired by Premier Wen Jiabao on Tuesday, decision makers decided to push forward the healthy development of the country's capital market, according to CCTV.

The reduction in the stamp tax followed new trading rules announced during the weekend that ordered the selling of a large amount of shares be conducted on a bloc trading system.

Intended to relieve the selling-pressure on the market, the rules, however, failed to put much faith into jittery investors who turned to profit-taking after an immediate rebound.

The benchmark Shanghai Composite Index tumbled more than 4 percent on Tuesday to fall below 3,000 points, the lowest level in 13 months, before rallying to positive territory. The gauge jumped 4.15 percent on Wednesday.

The tax cut came 11 months after the trading tax was tripled to 0.3 percent to take the steam out of a spectacular bull run that saw the SCI more than quadruple in less than two years.