BEIJING – Chinese stocks plunged Wednesday after the government raised a tax on share trades, trying to cool a market boom amid growing concerns about a possible bubble.
The main Shanghai Composite Index tumbled 6.5 percent at 4,071.27 after hitting a record high on Tuesday. The Shenzhen Composite Index for China's smaller second market fell even more, closing down 7.2 percent at 1,199.45.
The declines came after the Finance Ministry tripled the "stamp tax" on stock trades from 0.1 percent to 0.3 percent, effective Wednesday. The ministry was trying to "cool (the) stock market," the official Xinhua News Agency said.
"This policy change reveals the government's concern about a possible stock market bubble," said Citigroup economist Minggao Shen, describing the tax hike as Beijing's first formal move to cool the boom. "The market didn't know what the government was thinking until now."
Through Tuesday, Shanghai's benchmark index had climbed 62 percent this year, following a 130 percent surge in 2006.
The gains have been fueled by strong corporate profits and a flood of fresh money from millions of new investors sinking their savings into the stock market amid a scarcity of other investment options. Chinese banks pay just 3 percent interest on deposits.
The number of Chinese stock trading accounts has risen to about 100 million, with tens of thousands being opened every day. The press has reported on first-time investors mortgaging their homes or dipping into retirement savings to play the market.
Government officials and financial analysts have expressed concern that novices are making risky investments, creating a possible bubble in prices.
Wednesday's drop had a modest impact on regional stock markets, with Tokyo's benchmark index down 0.5 percent and Hong Kong's market down 0.86 percent. South Korean shares ended flat.
Chinese investor confidence has been buoyed in party by China's political calendar.
Many expect communist leaders to do whatever it takes to keep share prices up and avoid a public backlash ahead of a key party meeting in late 2007, when new leadership posts are due to be decided, and the Summer Olympics in Beijing next year.
The stamp tax increase "is an early move, so that even if the markets correct soon, they still have time to stabilize or even improve before the party meeting in the fall," said Citigroup's Shen.
Economists say a fall in the markets should have little impact on China's economy, because growth is driven by exports. Also, households have much more money in savings than in shares.
A fall in prices of even 20 percent is likely to have only a modest economic impact, J.P. Morgan economist Frank Gong said in a report to clients.
Gong noted that during a long bear market in 2001-2005, when the main market index fell from 2,300 to under 1,000 points, China's economy grew by about 10 percent per year.
The World Bank, in a report Wednesday, raised its forecast of China's economic growth this year to 10.4 percent, up from 9.6 percent, and said its current account surplus could reach $340 billion.
The stamp tax was set at 0.6 percent when it was introduced in the early 1990s but has been cut repeatedly to encourage the Chinese public to invest in stocks. It fell to 0.1 percent in 2005.
Analysts have been forecasting a possible Chinese correction due to the sharp price rise, reducing the likelihood that markets abroad would be taken by surprise.