Chinese Stocks Rebound After Selloff

Chinese stocks rebounded Thursday after a one-day plunge following government efforts to cool a market boom that economists worry could cause a price bubble.

The Shanghai Composite Index rose 1.4 percent to close at 4,109.65 points after tumbling 6.5 percent a day earlier. The Shenzhen Composite Index for the country's smaller second market, however, ended down 1 percent at 1,187.51 after a 7 percent the previous day.

Shares fell Wednesday after the Finance Ministry tripled a tax on stock trading in Beijing's first direct effort to cool a boom that has seen prices rise more than 50 percent this year.

"The momentum in the market has been really strong, and there are a lot of enthusiastic small investors, so the stamp duty hike might not have been enough to reverse the course," said Grace Ng, an economist with J.P. Morgan.

"Fundamentally, the view is still that the way for the market to go is up," she said. "If that continues, you probably would see more government measures."

Beijing's options include expanding a new program to let Chinese banks buy foreign stocks and bonds for small investors, a step that might reduce demand for Chinese shares, financial analysts say.

The impact of Wednesday's decline on markets abroad was muted, in contrast to February's global sell-off triggered by a 9 percent plunge in the Shanghai index.

Wall Street sent both the Standard & Poor's 500 index and the Dow Jones industrial average to record high closes on Wednesday. The S&P 500, long accepted as the more widely tracked index on Wall Street, rose 0.80 percent to 1,530.23. The Dow added 0.83 percent to 13,636.09. The more volatile Nasdaq — which isn't expected to reach its record of 5,048.62 anytime soon — rose 0.80 percent to 2,592.59.

Asian shares rebounded Thursday after modest declines the day before. Japan's Nikkei 225 index rose 1.64 percent, while Hong Kong's benchmark index rose 1.68 percent.

China's boom has been fueled by strong corporate profits and an infusion of new money from investors who want better returns in an economy with few investment options. Banks pay just 3 percent on deposits.

Millions of novice Chinese investors have opened trading accounts this year, dipping into savings, mortgaging homes and tapping retirement accounts to buy stocks.

Economists have warned of the danger of a growing bubble, while Chinese authorities have expressed concern that a sharp fall in prices could hurt newcomers.

The Finance Ministry Web site was inaccessible Wednesday, and Chinese news reports said it might have been hacked by protesters angered at the tax hike. But a ministry spokesman who refused to give his name denied the reports, telling The Associated Press on Thursday the Web site was shut down for testing.

The direct impact of Chinese price swings on markets abroad should be limited, because Beijing keeps its markets largely isolated from global financial flows. Most foreigners are barred from investing in the main class of Chinese stocks.

Regulators have been easing barriers to investing abroad by allowing banks to buy foreign stocks and bonds for domestic customers. But with Chinese stocks rising so fast, customers have used less than $1 billion of the total authorized $14.8 billion quota, a regulatory official told Dow Jones Newswires.

Yin Long, a China Banking Regulatory Commission official, said such investments could reach several billion dollars this year if stock and currency markets stay stable, Dow Jones reported.

Investor confidence has been buoyed in part by China's political calendar.

Many expect communist leaders to prop up share prices in order to avoid a public backlash ahead of a key party meeting in late 2007 that will decide new leadership posts.

"That is a factor that is very influential, especially for the mentality of small investors: that the leadership will not let prices fall," said J.P. Morgan's Ng.

Economists say a drop in stocks should have little impact on China's overall economy because growth is driven by exports. Also, households have much more money in savings than in shares.

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 was cut to 0.1 percent in 2005 to lure investors back to then-sluggish markets.