china stocks surge on tax cut

By Samuel Shen of Reuters

SHANGHAI -- China's main stock index has soared over seven per cent in frenzied trade on Thursday after the government cut the share trading tax, seeking to end a bear market that had slashed stock prices by half in six months.

Across the country, individual investors piled back into the market, and Internet chat rooms carried messages praising government officials believed to be responsible for the tax cut.

"The government has sent a very clear signal to help the market regain its confidence," said Xu Yan, strategist at Shenyin & Wanguo Securities.

But while fund managers and analysts said the tax cut could push stocks up at least 20 per cent in coming weeks, many noted that high inflation and the threat of an economic slowdown this year had not disappeared.

Some warned the tax cut risked encouraging the same speculative excesses which led to the market's crash. Investment Morgan Stanley described it as "a compromise with market speculators".

"We do not think such a rally can last. We advise investors to sell into strength," Morgan Stanley said in a report, adding that with the market expecting corporate earnings growth of 34 per cent this year, there was plenty of room for it to be disappointed if such growth did not materialise.

The Shanghai Composite Index ended the morning up 7.29 per cent at 3,517.395 points, after jumping as much as 9.60 per cent in early trade.

Rising Shanghai stocks overwhelmed losers by 889 to two, with over 100 shares climbing their 10 per cent daily limits, including China Life Insurance, the biggest life insurer, and CITIC Securities, China's largest listed brokerage.

Turnover in Shanghai A shares more than tripled to 126.84 billion yuan ($US18.2 billion) from Wednesday morning's 40.3 billion yuan, reaching levels seen during the height of China's stock market bull run last year.

The reduction in the stamp tax, to 0.1 per cent from 0.3 per cent, will make little difference to the investment costs of all but the most active traders.

But partly because of China's history as a command economy, investors are sensitive to official signals. They see the tax cut as a sign that authorities want to put a floor under the market at 3,000 points, to prevent a further slide from damaging the economy or possibly even causing social unrest.

Retracement

The index soared more than sixfold between June 2005 and last October's record peak, but then plunged 51 per cent to Tuesday's 13-month low of 2,990.788 points, hit by rising inflation, the threat of an economic slowdown, and heavy supplies of new equity.

Even before the tax cut was announced late on Wednesday, the index began rebounding from near technical support at 2,956 points, the 61.8 per cent retracement of its rise from mid-2005.

A 38.2 per cent retracement of the index's tumble from mid-January -- a reasonable expectation at the end of a downtrend -- would reach the 4,000-point area, technical analysis shows.

Fund managers said that given the uncertainty over the economy, all sectors of the market would not continue rising sharply across the board.

Some said Thursday morning's huge turnover might actually be a negative sign, showing plenty of investors were willing to sell when stocks rose their 10 per cent limits. If the market had been truly bullish about the longer term, investors might have held on to stocks, limiting turnover, they said.

"Today's market is full of pent-up exuberance. But eventually it's fundamentals, not government policies, that decide share prices," said Chen Ge, manager at Fullgoal Fund Management.

"So before we see signs of an improving economy, I don't think the rally will become another bull run. Further sharp rises will be capped by the growing willingness of institutional shareholders to take profits."

CITIC Securities said in a report that the strongest sectors in coming weeks were likely to be brokerages, because a revived stock market would boost their commissions, and blue chips in the banking, real estate and machinery sectors.


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