HONG KONG - After Chinese Premier Wen
Jiaobao pledged, in his policy address to the
opening of the National People's Congress (NPC)
session on Wednesday, to ensure the healthy and
steady development of the country's securities
market, market analysts are increasingly
optimistic about the market outlook this year
despite the current downturn pressures.
Wen's remarks failed to boost the market
immediately as the Shanghai Composite Index
dropped 43 to close at 4,293 on Wednesday. But his
words surely boost the expectation of analysts and
small investors that the government will soon take
measures to prop up the market.
An
imminent measure the government could take is to
the cut stamp duty on stock transactions. Some
Chinese economists and media commentaries have
already been urging the Ministry
of
Finance
to consider a cut to the stamp duty to bolster
investors' confidence, nine months after the tax
was tripled to 0.3% from 0.1% in an attempt to
cool speculation that had sent shares to record
highs since the beginning of 2007.
The
Ministry of Finance's announcement of the higher
stamp duty rate at midnight on May 29, effective
from May 30, had an immediate impact as investors
saw it as a sign more measures to suppress the
market might follow.
The Shanghai
Composite Index, which gained more than 1% to a
new high of 4,335 on May 29, dropped about 13% in
the following week.
Investors' confidence
was particularly damaged because days before the
announcement the ministry had repeatedly dismissed
as "market rumors" that it planned a stamp duty
increase. Even so, the market recovered after the
government approved the launch of new mutual funds
and with bullish editorials in the official media.
The Shanghai Composite Index, in its
recovery from the stamp duty reaction, rose to a
record 6,124 points in mid-October from around
2,600 points at the end of 2006 before falling in
the following months in part in reaction to the
spreading US subprime credit crunch.
Most
recently, investor sentiment has taken a knock on
the prospect of strained market liquidity because
of new share issues and the government-instigated
conversion of non-tradable shares into tradable
shares. The Shanghai Composite Index plunged
177.76 points on February 25 to close at 4192.53,
with 749 out of 910 stocks declining. The Shenzhen
Component Index slid 4.28%, or 692.85 points, to
15,486.67. The turnover on the two bourses was
down 16.4% from the previous Friday at 135.59
billion yuan.
The 0.3% stamp duty is
applicable to both buyers and sellers of stocks.
Looking to boost investor sentiment, He Qiang, a
member of the National Committee of the Chinese
People's Political Consultative Conference (CPPCC)
, said he will submit a proposal calling on the
government to change its bi-directional stamp tax
to one way during the annual sessions of the
CPPCC, China's top political advisory body, which
began on March 3, and of the NPC, which began on
Wednesday.
It was reported that He's
proposal has won support from dozens of CPPCC
members.
He, a professor at the Central
University of Finance and Economics, told Asia
Times Online that his action on his proposal, in
addition to boosting investor sentiment and
stimulating stock turnover, would be good for the
healthy development of China's stock markets.
"Cutting the stamp tax from bilateral [on
purchases and sales] to unilateral not only
stimulates stock turnover, but also encourages
retail investors to play the stocks as a long-term
investment rather than for short speculative
gains," he said. "If the stamp duty is applicable
only to sellers of stock, buyers will be taught to
see beyond just making a short-term profit."
The stamp tax had increased the risks and
trading costs for retail traders, he said.
Government income from stamp taxes reached
200.5 billion yuan in 2007, a 10-fold increase
from 2006, surpassing the dividends of 180 billion
yuan distributed by listed companies.
He's
proposal to tax the equity market on stamp duties
only unilaterally won support from many investors,
with 98% of about 150,000 investors going online
support the idea, according to Xiaoxiang Chenbao
(Xiaoxiang Evening News).
China imposed a
0.6% stamp tax on stock transactions after its
markets were created in 1990. The rate was
subsequently adjusted several times, including a
cut from 0.2% to 0.1% in 2005 in a bid to boost
the then-depressed market.
Twenty
countries or regions levy stamp duty on share
transactions, of which only Australia and China,
including Hong Kong, levy the tax bilaterally.
Ronald Arculli, chairman of Hong Kong Exchanges
and Clearing, which runs the former territory's
bourse, last month called for the government there
to lower or abolish the duty to sharpen Hong
Kong's competitive edge and help to attract more
investors and enterprises for listing.
The
UK charges 0.5% stamp duty, but only on buyers.
Hong Kong levies 0.25% on buyers and seller.
Andy Xie, independent economist and former
Morgan Stanley economist, echoed He's views on
cutting the stamp duty from bilateral to
unilateral, saying this would signal more measures
to come and so help boost the stock market in the
short term.
Renmin University professor
and government economic adviser Wu Xiaoqiu said
stamp duty on stock trades should be scrapped,
while arguing that the earlier tripling of the tax
to curb investor demand was not a correct way to
calm the market.
Rumors of an imminent cut
in stock transaction stamp duty have encouraged
some speculative activity. On February 27, the
Shanghai Composite Index surged 2.26%, the largest
one-day jump in three weeks to 4,334.05, with 811
out of 910 stocks closing higher.
On the
same day, the International Finance News newspaper
quoted an unidentified source as saying the
authorities are considering cutting the stamp
duty. The report did not indicate a possible
timetable.
At a press conference on the
sidelines of the NPC meeting on Thursday, Minister
of Finance Xie Xuren said public discussions about
cutting the stamp duty had been noted and the
ministry would "seriously consider" readjustment
of the tax.
Analysts believe no final
decision on the cut will be made until the new
government's new cabinet begins work after its
formation is endorsed by the NPC on March 18.
Olivia Chung is
a senior Asia Times Online reporter.
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