Chinese stock markets plunge after tax increase

Wednesday, May 30, 2007

In trading Wednesday, the Chinese stock markets plunged after the government tripled a tax on securities transactions. The so-called stamp tax was raised from 0.1% to 0.3% in an effort to cool the rapidly rising market.

The Shanghai Composite Index of A-shares fell 6.5%. The CSI 300 fell 6.8%, with over half of the listed companies falling the single day limit of 10%.

The market has already doubled in value this year, after rising 130% in 2006. It is estimated that some 300,000 new brokerage accounts are opened on an average day. Novice investors are reportedly sinking their life savings into the market.

Meanwhile, the World Bank raised its forecast for GDP growth for China in 2007, from 9.6% to 10.4%.

“The stamp tax is the latest gesture by the Chinese government to warn investors,” Phil Chen of Grand Cathay Securities Investment Trust Co. told Bloomberg. “The trouble is, Chinese investors probably won’t care if a few breadcrumbs are dropped in the transaction as they have such extraordinary returns on their investments.”