Chinese shares sink after trading tax hiked

updated 1:38 p.m. ET May 30, 2007

BEIJING - How do you say irrational exuberance in Chinese?

Alan Greenspan, the former Federal Reserve chairman, may not know how to say it, but — as he proved in 1996 when he coined the term in reference to the U.S. tech boom — he knows it when he sees it. Last week, he pronounced the meteoric rise of China’s stock market unsustainable.

But China’s leaders may have found a way to control it, at least for now.

Effective Wednesday, they tripled the “stamp tax” on stock trades from 0.1 percent to 0.3 percent. In response, the main Shanghai Composite Index tumbled 6.5 percent to 4,071.27 Wednesday after hitting a record high on Tuesday. The Shenzhen Composite Index for China’s smaller second market fell even more, closing down 7.2 percent at 1,199.45.

The decline in Chinese shares hit other markets, too, although not as dramatically as on Feb. 27, when investors around the world flinched from a nearly 9 percent slide in the Shanghai index.

Despite the drop Wednesday, Shanghai’s benchmark index is still up 52 percent for the year, following a 130 percent jump in 2006.

“This policy change reveals the government’s concern about a possible stock market bubble,” said Citigroup economist Minggao Shen, describing the tax hike as Beijing’s first formal move to cool the boom. “The market didn’t know what the government was thinking until now.”

The gains have been fueled by strong corporate profits and a flood of fresh money from millions of new investors sinking their savings into the stock market amid a scarcity of other investment options. Chinese banks pay just 3 percent interest on deposits.

The number of Chinese stock trading accounts has risen to about 100 million, with tens of thousands being opened every day. The press has reported on first-time investors mortgaging their homes or dipping into retirement savings to play the market.

Government officials and financial analysts have expressed concern that some novices are making risky investments, creating a possible bubble in prices.

Wednesday’s drop modestly affected regional stock markets, with Tokyo’s benchmark index slipping 0.5 percent and Hong Kong’s market closing down 0.9 percent. South Korean shares inched up to a new record.

In Europe, stocks ended modestly lower after initially being off about 1 percent following the retrenchment in China. European stocks gained strength after the U.S. markets opened down only moderately, easing concerns of a sharp global pullback. Britain’s FTSE 100 slipped 0.07 percent, Germany’s DAX index fell 0.21 percent, and France’s CAC-40 gave up 0.24 percent.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Financials pull stocks up ahead of earnings   Laid-off cubicle dwellers pursue trucking jobs Earnings reports should give clues on economy Oil settles below $60 on demand worries Price of gas down 10 cents in the last two weeks Consumers' mood sours in early July Trade gap narrows to 9-year low in May Nation’s retailers report weak June sales Weekly jobless claims drop unexpectedly Obama: Nations must fight global warming Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: