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SCMP Reporter

Stocks reverse losses after message on positive long-term outlook despite correction

Senior mainland officials attempted to talk up the stock market yesterday, after an increase in stamp duty on share trades triggered a slump and led to substantial volatility over the past week.

Gao Xiqing, a vice-chairman of the National Social Security Fund, one of the country's biggest institutional investors, and People's Bank of China deputy governor Wu Xiaoling said the long-term outlook for the market remained positive, despite a short-term correction.

The Shanghai Composite Index dropped 12.89 per cent in the past week from its peak on May 29, after the government tripled the stamp duty last Wednesday.

The sudden rise was widely criticised by retail investors, who were upset  that some government officials had denied that the stamp duty would be raised just a few days before the increase was imposed.

Mr Gao said he was positive about the market's long-term outlook, and the social security fund, which usually holds stocks for 10 to 15 years, would not be seriously affected by the short-term volatility.

His remarks appeared to be a U-turn on those made two months ago, when he said the fund was concerned about market risks and planned to reduce its exposure to equities.

Over the past couple of months, many officials including those from the China Securities Regulatory Commission had  voiced concerns over the rapid growth in mainland markets, saying that a stock bubble was forming.

Ms Wu said yesterday the central government had been careful in nurturing the stock markets and retail investors should understand its efforts  to build solid and healthy markets.

'I would like to say that in a growing market like China, the long-term advance of the stock markets is inevitable and long-term gains are also inevitable,' Ms Wu said. 'Ups and downs are normal in any stock market, and a short-term adjustment will not affect the stock market's long-term performance.'

Following the comments, the Shanghai Composite Index, which opened about 1 per cent lower yesterday, recovered in the afternoon to close up 0.24 per cent at 3,776.317 points, its second straight  gain.

The Shenzhen Composite Index gained 1.89 per cent to finish at 1,086.219 points.

Hong Kong's Hang Seng Index, however, slid 0.11 per cent to end at 20,818.61 points. The H-share index, which tracks mainland-related stocks, rose 0.06 per cent to 11,028.71 points.

Xia Bin, a director of the Financial Research Institute under the State Council's Development Research Centre, also said he was positive about the long-term outlook for the country's stock markets.

'I understand people may get a little nervous during this downturn, but the basic factors behind China's booming economy  have not changed,' Mr Xia said. 'As long as there are no big financial policy mistakes, China's stock markets  will keep going up.'

Concerns of a market correction have  slowed growth in  new stock accounts in the mainland to the  lowest level since April.

New accounts for trading in mainland shares and investing in mutual funds totalled 189,056 on  Tuesday, the lowest since April 11, according to the China Securities Depository  and Clearing Corp. That is down from 723,463 on May 30 when the stamp duty  increase was imposed and a far cry from the peak of 1.08 million on April 30.

'It's normal that  new account numbers did not decrease in the first two days after the imposition of the stamp tax policy,' said Liu Xianhui at Shanghai Securities. 'After a couple of days, when retail investors fully understood the meaning of the policy, the number started to fall.'

Yesterday's market gains  came despite comments from other senior officials that Beijing might further raise interest rates.

Any interest rate increase is widely anticipated to divert money away from shares, cooling the stock markets.

Central bank governor Zhou Xiaochuan told China Central Television that he would think about whether to increase interest rates when inflation figures for last month are released later this week.

Mr Zhou said the central bank would not rule out the possibility of an interest rate change to balance the stock markets, but the decision would be based on various financial indicators.



Officials talk up mainland market