China raises stamp tax to cool equity market

Last night the Chinese government announced that the stamp duty would be raised from 0.1% to 0.3%. Following the news, domestic Chinese equity markets fell quite sharply.

The Shanghai B-share index fell close to 10% during the day while the Shanghai A-share market fell around 7%. Offshore Chinese equity markets such as H-shares and red chips, experienced much lower falls of around 1-2% (as at the time of writing).The increase in the stamp tax indicates that the government is willing to step in to try and cool speculation. It is significant in that it is directed at the stock market, unlike previous measures which targeted the economy. However the increase itself of 0.2% is not substantial. The record high for the stamp tax was 0.6% in 1990.

According to China’s Finance Ministry, the recent move is to “promote the healthy development of the stock market”. The measure also appears to target short term traders, rather than long term investors. It levies a higher cost on equity trades, but does not tax longer term capital gains, thereby not hurting long term investors as much. There had been rumours of a capital gains tax for equity investors earlier this year, but they have yet to be proven true.

While the government may consider other measures, including further increases in stamp duties, these measures are unlikely to be harsh. The Chinese government appears to prefer at this stage, a variety of less aggressive measures to reduce the level of speculative activity in domestic share markets. This includes expanding the Qualified Domestic Institutional Investor (QDII) Scheme to allow local investors to invest overseas. This should help alleviate some of the pressure in domestic equity markets. In the short term, Chinese equity markets, especially A-shares and B-shares, are likely to trade in a volatile range, as investors take profits. Markets are likely to undergo a period of consolidation, to work off some of the excessive trading froth. However the underlying fundamentals for China, such as strong economic and earnings growth, remain in intact. Within Chinese equity markets attention is likely to switch to Hong Kong listed China Shares, which should benefit from the expansion of the QDII Scheme. They have not run as hard as the A share market and PE valuations are in the teens (refer to table). We see opportunities for H-shares, red chips, and P-chips which are HK listed Chinese private enterprises.

By Leon Goldfeld, Chief Investment Officer, HSBC Investments (Hong Kong).