China Raises Stamp Duty to Cool Stock Market
Topics:Shanghai | China | Market Outlook | Stock Market
By Reuters | 29 May 2007 | 07:02 PM ET 
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The Chinese authorities decided to raise stock trading stamp duty to 0.3% 
starting on Wednesday from the current 0.1%, a move seen as a bid to clamp down 
on the overheated market. 

China's Ministry of Finance made the midnight announcement through the the 
official Xinhua news agency. 

The unusual move underlined the government's deep concern following a 62% rise 
in the key stock index, the Shanghai Composite Index, so far this year and 
repeated record highs this month. The sharp increase in the index came on top 
of a 130% jump last year. 

"An official with the ministry said the tax rise, which has been approved by 
the State Council, or the Chinese cabinet, is intended to help promote the 
healthy development of the securities markets," Xinhua said in a report. 

The Dow Jones Industrial Average fell on Tuesday, and the Nasdaq Composite 
Index pared earlier gains after China's announcement and a sharp drop in oil 
prices hurt shares of energy companies. 

American depositary receipts of Chinese companies traded in New York also fell 
on the news. 

The Chinese hike in the stamp duty, which is based on transaction turnover and 
is levied on both sellers and buyers, came after regulators warned of stock 
trading risks and ordered brokerages to educate investors about the risks 
several times. 

On May 18 -- in the biggest effort to cool the market before Wednesday's duty 
increase -- China's central bank announced a slew of cooling steps: an interest 
rate hike, an increase in the bank reserve ratio and a widening of the yuan's 
trading band. But the market continued to hit record highs. 

In the modern Chinese stock market's 16-year-plus history, a stamp duty raise 
has always caused a market slump over the next few weeks or an end to a bull 
run in stocks. 

In July 1990, China began levying stamp duty on the Shenzhen Stock Exchange 
during a market boom, ordering sellers to pay 0.6% of their total transaction 
turnover. That November, it doubled the duty it collects on buyers. 

The stamp duty and the increase triggered a slump in the Shenzhen market, 
forcing authorities to cut it in half to 0.3% in October 1991, when China's 
other market, the Shanghai Stock Exchange, also began collecting duty on both 
trading sides. 

In 1996, China's stock market began a strong bull run, with the Shanghai 
composite index nearly tripling from early 1996 to early May 1997 despite 
repeated official warnings of an overheated market. 

On May 10, 1997, Beijing raised the stamp duty to 0.5% from 0.3%, ending the 
bull run and causing a bear market that lasted until mid-1999. 

The government lowered the duty in January 2005 to 0.1% from 0.2% in order to 
boost stock prices during a market slump lasting from 2001 to 2005. 

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