China's stockmarket

May 1st 2008 | SHANGHAI
From The Economist print edition

How meddling has helped investors

A USEFUL indicator of the febrile state of China's stockmarkets for much of last year was the crowd that often packed the Shenyin & Wanguo broker in Shanghai's People's Square watching an electronic bulletin board lit up by the flashes of rapidly rising share prices. Appropriately in China, rising prices are signalled by the colour red, not black, and on April 24th the crowds were back again, after an absence of many months, watching a screen that was gloriously drenched in the colour of the revolution.

The immediate cause of the rally was put down to a minor reduction in a tax on trading, or stamp duty, from 0.3% to 0.1%. But many believed the euphoria stemmed more from a belief that the authorities were finally prepared to prop up share prices. Since the autumn, the benchmark Shanghai-A-share index had fallen by half before the tax was changed.

It is not the first time the government has meddled with stamp duty (see chart), but after a relatively long period of official inactivity, it came as a welcome surprise. A rise in the tax last May was intended to temper the animal spirits that were turning brokers like Shenyin & Wanguo into heaving gambling dens. At that point, it worked only briefly, and over the summer the authorities introduced several other cooling measures, such as limits on foreign investment and curbs on the introduction of new investment funds, before the market finally peaked.

Recently, these measures have been reversed. New mutual funds are being approved, and the quota of shares that foreign investors are allowed to buy has risen to $30 billion from $10 billion. Meanwhile, the supply of shares has been restricted. Large investors in recent public offerings have been told that when lock-ups end on selling the shares, blocks of shares must be privately sold rather than be dumped onto the market. Secondary offerings by companies have been delayed, as have the listings of foreign companies on the Shanghai bourse.

It is easy to see why the government may be tempted to intervene. Although the stockmarket's drop has not been economically disastrous, it has undermined the country's efforts to improve efficiency through privatisations. It has also affected the bit of wealth that many relatively poor investors had.

Slowly, however, questions are emerging within China about whether the government should be interfering with the markets at all. Caijing, a Beijing-based magazine, has argued that intervention is antithetical to building an efficient market and, given the forces involved, will ultimately be ineffective. The comment, which was hardly radical, provoked a blizzard of news coverage and plenty of angry letters. On the other hand, for many of the unsophisticated and drably dressed punters in Shenyin & Wanguo, a sense that the government still cares about their lot could not have come too soon.