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Two policies to stablize China market

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(Update Apr 24) The trading tax bullet worked, at least for a day. The Shanghai composite index went up 305 points, or 9.29%. Similar performance from Shenzhen. All but two stocks in the two markets went up, many went up 10% (the limit). See the below picture for more details.

SHA_COMP_042408
(The thumbnail above is clickable, for faster download, click here for a full size picture)

(Original) The Chinese goverment (regulatories) has listened, and now they are pulling the trigger. Here are the two new policies:

On April 20 Sunday evening, they unveil the new lockup share transaction rules. Basically they are saying any large block of shares (larger than 1% of overall shares) has to go through a special trading platform, to avoid the large supply of unlocked shares. Reasonable move. But I heard people already abused the system. Guess what? They sell 0.99% instead of 1% (Chinese news from Sina). This is one thing I don’t like some of my countrymen: they cut corners and bend the rules. One reason Chinese have not made good quality cars like the Japanese do?

Rule number 2, the widely antipated “lowering stamp tax” (or trading tax) will take effect from April 24. The current trading tax was raised last year May 30 (also in the mid night), and there was a huge outcry about the timing of the raising tax. People disliked the “non-transparency” of those sort of the things. Appearently goverment listened again, they announced this good news after the market close (not the midnight) on April 23.

You can read more details from CCTV (there is also a video), Forbes (lockup shares) and Bloomberg (trading tax).

China A share market
My take on those policies

The Chinese market dropped a lot recently because of the market was way over-priced before the drop. The current drop is simply return the market to fair valuation. It’s a good thing for the long term health of the market itself (do I sound like a politician?). The goverment’s move should not be taken as a rescue effort like the US fed dramatic rescue of Bear Stearns on the March 22 weekend, in which case the US financial system/institutions were at risk.

That being said, China does have its own problem, the most serious being the float of unlocked shares. The companies got those shares at dirt cheap price, and will do anything to lock in the profit. The goverment policies were aimed to restore the investor confidence, but the fundamental problem I mentioned above IS NOT solved…

1 reply on “Two policies to stablize China market”

[…] Chinese stocks traded on U.S. exchanges also had a solid month in April, rising along with U.S. stocks. Chinese ADRs also got support from favorable policies adopted by Chinese security regulators aimed to stabilize the market after the Shanghai Composite Index (^SSEC) lost half of its value in less than half a year. For the month, SSEC jumped 6.35% and the Hong Kong’s Hang Seng Index (^HSI) surged 12.72%. Among Chinese ADRs, VanceInfo Technologies (VIT) led the way with a gain of 142.60%, followed by Sohu.com (SOHU)’s 53.18%. Chinese search engine Baidu.com (BIDU) also recorded a 52.57% gain in share price. The month’s biggest loser was Agria (GRO), China’s agriculture products, such as seeds and feeding products, provider, which saw its share tumbled nearly 50%, despite record food price. […]

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