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Stocks Soar in China After Government Cuts Trading Tax

  • Naomi Martig

China's stock market saw its largest gain in more than six years after the government cut the tax on stock transactions. As Naomi Martig reports from Hong Kong, Chinese authorities apparently hope the move will help bounce share prices back into positive territory after months of weakness.

The Shanghai Composite Index closed more than nine percent higher, its biggest one-day percentage gain since 2001.

The surge in share prices began after Chinese authorities lowered the stamp tax on share transactions to .1 percent from .3 percent.

The Shanghai market has fallen by more than 50 percent since its October peak because of rising inflation and fears of a worldwide economic slowdown this year. Other Asian markets have also slumped.

Stephen Green, senior China economist at Standard Chartered Bank in Shanghai, says last year Beijing raised the trading tax because of fears that stock prices were rising too fast.

"So we're 50 percent off in terms of the Shanghai Index now and looking forward it's difficult to be optimistic about the next few months as well. So Beijing probably wants to draw a line in the sand, and stamp tax, lowering the stamp tax and doing some other things it hopes will achieve that," said Green.

Some market analysts think the tax change could fuel a 20 percent bounce in the Shanghai market. But Green says investors remain anxious about rising inflation and signs of slowing in the global economy.

"We are seeing food prices continue to rise, we're seeing fundamentally inflationary pressures across the economy, particularly from things like oil, iron ore, and copper. These things are now very much in the system, they're upstream and we are waiting for them to hit the downstream prices, retail prices. And so there is more inflation to come," said Green.

Green says corporate profits are likely to weaken over the next several months because of inflation and tight credit because of government restrictions on bank loans.

"And that means that the government if it's serious about combating that inflation needs to be serious about continuing to be tight, tighter monetary policy, controlling the amount of leans the bank lends, raising interest rates, all those things," he said.

In other trading in Asia, Hong Kong's Hang Seng Index finished 1.5 percentage points higher, a three-month closing high. Tokyo's Nikkei average, however, fell slightly because of fears of lower company earnings.