China’s stocks nosedive as stamp tax increases

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“All the King’s horses and all the King’s men, couldn’t put Humpty together again.” The stock bubble has burst! Or has it really? Stocks crashed down from their soaring highs yesterday in Shanghai and Shenzhen, creating a fallout effect across most of Asia after China moved to triple the tax on stock trading. The increase was an effort to reign in the soaring stock market as everyone from Alan Greenspan to Shanghai taxi drivers has warned about the growing stock market bubble.

David Barboza and Keith Bradsher of the International Herald Tribune:

Investors reacted by selling shares and pushing the two major stock exchanges sharply lower. The Shanghai Composite Index plunged 6.5 percent to close at 4,053.09. The Shenzhen Composite Index dropped 7.2 percent to close at 1,199.45.

When Chinese shares fell sharply in February, markets around the world tumbled in tandem on worries of broader troubles for the nation’s economy. But shares in other parts of Asia fell only modestly Wednesday. Hong Kong’s Hang Seng Index dipped nine-tenths of a percent, and the Nikkei Index in Tokyo slid about half a percent.

It seems that investors across the world are finally waking up to the fact that the Chinese markets are overvalued, and short-term corrections were inevitable. Yesterday’s plunge will most likely turn out to be a brief pause in a very bullish market and the index will no doubt rebound within days. But the increased stamp duty may force investors to play a little safer.

The Ministry of Finance increased the stamp duties on share trades to 0.3 percent from 0.1 percent yesterday, a move aimed to “promote the healthy development of the securities market,” according to an announcement on the ministry’s website. The new regulation won’t affect the many small investors in the market according to Xinhua.

Many small investors are likely to continue their stock market forays despite disillusionment among a few over the tripling of the stamp tax on trading that prompted the sharpest dive in three months on Wednesday.

“The expected fall is a good opportunity to buy more,” said Mrs Guo, 67, who arrived at a branch of Guoxin Securities in Beijing one hour ahead of the opening time of the stock market at 9:30 a.m..

What Xinhua fails to mention of course is the that the majority of trading occurring on the Shanghai and Shenzhen exchanges is not initiated by the likes of Mrs. Guo. While short term trading may be affected, investors will likely begin to look at long term investment strategies.