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Chinese Shares Slump After Stock Trading Tax Hike

China increased its tax on share trades, leading to a 6.5 percent drop in its main stock index and jitters throughout Asian markets. Joseph Popiolkowski reports from Hong Kong.

The benchmark Shanghai Composite Index fell 281 points Wednesday after China's decision to triple its tax on share trades.

Late Tuesday, China's Ministry of Finance announced the increase from 0.1 percent to 0.3 percent.

It is the government's latest effort to cool the market, which has more than doubled over the past 12 months.

The effect was felt region-wide as Hong Kong's Hang Seng share index closed down nearly one percent Wednesday. Markets in Japan and Singapore also declined.

Wednesday's drop comes after weeks of warnings by economists and market experts - including former U.S. Federal Reserve chairman Alan Greenspan - that Chinese stocks were due for a fall.

One expert called the market's decline a "healthy correction". However, Enzio von Pfeil, who heads the research firm Commercial Economics Asia in Hong Kong, says the increased tax is an attempt to stabilize the market before China's Communist Party Congress late this year.

"What we've seen today is a bump on the way up, in other words it's people going up an escalator not down an escalator for the very simple reason that the central government in Beijing wants to continue very, very strong growth. It wants to show its very best possible face that it can," he said.

Enzio von Pfeil downplayed its effect on regional markets and says after an initial downturn they will rebound.

"There will be a short, sharp move down Wednesday but in those economies where the economic time is still particularly good - for instance in Hong Kong and Korea, which is what we're telling our clients - that is where I think you will find a lot of buying coming back in. So the idea here is to buy on weakness and that's what I think will happen tomorrow," he said.

In recent weeks, China also increased its interest rates and bank reserve ratios, which, like Wednesday's stamp tax increase, von Pfeil says were part of a series of attempts to rein in the market. However, he says, Beijing is reluctant to pull the reins too hard and risk slowing the economy too far and causing a rise in unemployment.