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Stamp duty rise tips markets into downturn

HSBC

Mainland stocks plunge is just the start, analysts say

Mainland stock markets had their biggest falls in three months yesterday after the government unexpectedly tripled the stamp duty paid on share trades - its most decisive action yet to cool months of frenzied speculation that has sent the bourses to record highs.

At one point the benchmark Shanghai Composite Index was down as much as 7.37 per cent from Tuesday's record closing high of 4,334.8 , but rallied to end 6.5 per cent down, at 4,053.088, its lowest close since May 21. The fall was the biggest since February 27, when the main index dropped 8.84 per cent.

One analyst predicted a big short-term drop in the index.

'It takes time for the market to digest the shock from the stamp duty hike. The Shanghai index will seek bottom at around 3,000 in June,' said Wang Sheng, a strategist at Haitong Securities, based in Shanghai.

'A meaningful correction is needed to bring the current pricey A-shares back to more reasonable valuations.'

Analysts said the stamp duty rise specifically targeted the foaming stock market, whereas previous tightening policies have mainly been aimed at checking inflation, the mainland's excessive money supply and huge trade surplus.

More tough tightening policies would come if the stamp duty increase did not have the desired effect, the analysts warned.

'The stamp duty move [comes] just about two weeks after the three-pronged monetary clampdown by the People's Bank of China, which involved an interest rate hike, lifting banks' required reserve ratio and widening the yuan's daily trading band, and should further show the authority's determination in cooling the red-hot market,' wrote ICEA Securities Asia in a daily note yesterday. 'This creates an overhang to the market and more measures will come if the market shows no signs of cooling. We therefore expect a short-term weakness in the A-share market.'

HSBC regional equity strategist Steven Sun expects further monetary tightening measures will trigger a long-overdue correction in A-share markets within three months. The measures include the domestic launch of trading in financial futures, big initial public offerings of A shares by Hong Kong-listed mainland firms and more steps to encourage investment outside the domestic share markets.

Like the Shanghai index, the Shenzhen Composite Index also fell heavily, closing down 7.19 per cent or 92.988 points, at 1,199.454.

Shares of more than 800 of the 1,453 companies listed on the two bourses fell by their daily limits. Turnover of the two markets was a record 416.59 billion yuan.

Over 900 billion yuan was wiped off the two markets' capitalisation.

Dragged lower by the mainland markets, Hong Kong's Hang Seng Index closed down 0.86 per cent, at 20,293.76, while the H-share index of big mainland firms fell 2 per cent to 10,403.44. Asian stock markets all fell, with the drops ranging from 0.48 per cent for Japan's Nikkei 225 Index to 1.57 per cent for the Philippines' main index.

The falls also spread to European stock markets, but they recovered in late-afternoon trading.

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