Chinese shares sink after trading tax hiked

In early afternoon trading, the Dow Jones industrial average moved back into positive territory after dropping about 60 points at the open. The blue chip index advanced 22.76, or 0.17 percent, to 13,544.10.

Broader stock indicators also turned positive. The Standard & Poor’s 500 index rose 2.96, or 0.19 percent, to 1,521.07, and the Nasdaq composite index rose 0.85, or 0.03 percent, to 2,572.91.

The effects of the pullback in China’s markets are somewhat limited to domestic investors as the country limits foreign investment in certain areas. While it has eased restrictions, the government still controls how many foreigners can purchase the mainstream, yuan-denominated stocks. Known as “A shares,” these stocks account for the largest slice of the markets. There are also foreign currency-denominated “B shares.” The benchmark Shanghai Composite Index tracks both A and B shares.

Retail investors in China have recently been moving into the B share market, however, as valuations remained lower than in the A share market.

Chinese investor confidence has been buoyed in part by China’s political calendar.

Many expect communist leaders to do whatever it takes to keep share prices up and avoid a public backlash ahead of a key party meeting in late 2007, when new leadership posts are due to be decided, and the Summer Olympics in Beijing next year.

The stamp tax increase “is an early move, so that even if the markets correct soon, they still have time to stabilize or even improve before the party meeting in the fall,” said Citigroup’s Shen.

Economists say a fall in the markets should have little impact on China’s economy, because growth is driven by exports. Also, households have much more money in savings than in shares.

A fall in prices of even 20 percent is likely to have only a modest economic impact, J.P. Morgan economist Frank Gong said in a report to clients.

Gong noted that during a long bear market in 2001-2005, when the main market index fell from 2,300 to under 1,000 points, China’s economy grew by about 10 percent per year.

The World Bank, in a report Wednesday, raised its forecast of China’s economic growth this year to 10.4 percent, up from 9.6 percent, and said its current account surplus could reach $340 billion.

The stamp tax was set at 0.6 percent when it was introduced in the early 1990s but has been cut repeatedly to encourage the Chinese public to invest in stocks. It fell to 0.1 percent in 2005.

Analysts have been forecasting a possible Chinese correction due to the sharp price rise, reducing the likelihood that markets abroad would be taken by surprise.

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