China finally took decisive action to bring its stock markets under control on May 30 as the stamp duty on stock market transactions increased from 0.1% to 0.3%. It was claimed that the government could reap an extra US$40 billion through the levy, roughly equal to China’s official defense budget.
The tax hike, which came after the Shanghai Composite Index (SCI) rose 62% in May – the record for a single month – had its desired effect. The SCI finished the day down 6.5% at 4053.08.
Analysts were skeptical as to how much of a long-term effect the measure would have – a hefty 426,000 new trading accounts were still opened on the day the stamp duty increased – and May 31 did indeed see a rebound.
However, the good times did not last long as the market started sliding. On June 4, just days after passing 4,300 points, the SCI fell 8.7% to 3,670. It was the second biggest single day loss of the year, after February’s 8.8% drop.
Dispelling suggestions that China equities are big enough to trigger a global slump – the February slide coincided with a blip in confidence in the US, which sent bourses tumbling around the globe – other markets in the region remained stable.
Perhaps fearing the SCI would sink as quickly as it had risen, the regulator stepped in with a positive gesture, approving four new equities funds.
The June 5 revival was further fueled by rumors that the capital gains tax on stock trades, never officially confirmed, would not be implemented. There was also unconfirmed talk of government agencies making a large injection of public funds into the market.
Other influential voices piped up in due course – notably the central bank and the National Social Security Fund – each one emphasizing the strong potential for long-term growth in the market.
Investors needed no further invitation and the SCI continued its rise, sitting comfortably above 4,200 by mid-June.