China Raises Stamp Duty to Temper Soaring Stock Market

Wednesday, 30 May 2007 | 1:22 PM ET

The Chinese authorities decided to raise stock trading stamp duty to 0.3% starting on Wednesday from the current 0.1%, a move seen as a bid to clamp down on the overheated market.

The move had a chilling effect on equity markets across Asia and in Europe, though U.S. stocks proved more resilient.

China's Ministry of Finance made the midnight announcement through the the official Xinhua news agency.

The unusual move underlined the government's deep concern following a 62% rise in the key stock index, the Shanghai Composite Index, so far this year and repeated record highs this month. The sharp increase in the index came on top of a 130% jump last year.

"An official with the ministry said the tax rise, which has been approved by the State Council, or the Chinese cabinet, is intended to help promote the healthy development of the securities markets," Xinhua said in a report.

The Chinese hike in the stamp duty, which is based on transaction turnover and is levied on both sellers and buyers, came after regulators warned of stock trading risks and ordered brokerages to educate investors about the risks several times.

On May 18 -- in the biggest effort to cool the market before Wednesday's duty increase -- China's central bank announced a slew of cooling steps: an interest rate hike, an increase in the bank reserve ratio and a widening of the yuan's trading band. But the market continued to hit record highs.

In the modern Chinese stock market's 16-year-plus history, a stamp duty raise has always caused a market slump over the next few weeks or an end to a bull run in stocks.

In July 1990, China began levying stamp duty on the Shenzhen Stock Exchange during a market boom, ordering sellers to pay 0.6% of their total transaction turnover. That November, it doubled the duty it collects on buyers.

The stamp duty and the increase triggered a slump in the Shenzhen market, forcing authorities to cut it in half to 0.3% in October 1991, when China's other market, the Shanghai Stock Exchange, also began collecting duty on both trading sides.

In 1996, China's stock market began a strong bull run, with the Shanghai composite index nearly tripling from early 1996 to early May 1997 despite repeated official warnings of an overheated market.

On May 10, 1997, Beijing raised the stamp duty to 0.5% from 0.3%, ending the bull run and causing a bear market that lasted until mid-1999.

The government lowered the duty in January 2005 to 0.1% from 0.2% in order to boost stock prices during a market slump lasting from 2001 to 2005.


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