China cancels stamp tax on stock purchase to support equities market

China decided on Thursday to scrap the stamp tax on stock purchase, effective on Friday, in a move to boost the equities market after domestic stocks fell for third consecutive day since Tuesday.

With the authorization of the State Council, Chinas Cabinet, the Ministry of Finance and the State Administration of Taxation said they decided to cancel the share trading stamp tax on stock purchase while the stamp tax on share selling remained unchanged at 0.1 percent.

The cancellation came hours after Chinese stocks tumbled 1.72 percent on Thursday, amid the current global financial turmoil.

It was the first time since 1991 authorities had levied an unilateral stamp tax on stocks trading and the second time this year they had adjusted the stock trading stamp tax.

On April 24, it cut the tax from 0.3 percent to 0.1 percent amid falling share prices.

DIRECT UPWARD FORCE

Also on Thursday, Central Huijin Investment Co., Ltd., an investment arm of the government, said it would buy shares of three major Chinese lenders on the secondary market to fortify their share prices amid the stock market slump.

"Its a direct upward force for the market and involved industry capital," said Zhang Yong, an analyst with Great Wall Securities.

The company said it would buy the shares of Industrial and Commercial Bank of China (ICBC), the Bank of China (BOC) and the China Construction Bank (CCB) and the operation had started on Thursday.

The move was to ensure the governments interest in the three lenders, support the steady operation of major state-owned financial institutions and stabilize their share prices.

"The decision was important for a stable operation of the capital market," said a China Securities Regulatory Commission (CSRC) spokesman.

Central Huijin was set up in 2002 with a mission to reform state-owned banks burdened with a high ratio of non-performing loans.

The CSRC spokesman said promoting a steady and healthy development of the countrys capital market had been a strategic decision of the government. The CSRC would keep a close watch over the impact of overseas market turmoil on the domestic market.

"So far, the Chinese economy has maintained good momentum. The countrys capital market was built on a solid economic foundation and enjoyed a stable institutional environment."

He said as the next move, the securities regulator would step up building fundamental market systems, improve market supervision and enforce the markets internal level-off mechanism to promote the sound development of the capital market.

POLICY PACKAGE

"The sluggish stock market has influenced the real economys growth. Stocks of some listed companies had been undervalued. The stamp tax cut was aimed to restore their stock value to a reasonable level," said Bai Jingming, a Ministry of Finance researcher.

The authorities had adjusted the monetary policies in preparation of the stamp tax abolishment. On Monday, the country became the first to cut its interest rates as markets across the world reacted to the crisis on the Wall Street.

The central bank cut rates by 0.27 percentage points to 7.2 percent. It also cut the reserve requirement ratio for all but the countrys five largest banks by 1 percentage point to 16.5 percent.

Following the first rate cut since 2004, banks plummeted on domestic bourses. ICBC and CCB both dropped by the daily limit of 10 percent on Tuesday and Wednesday.

"The banking sectors fundamentals are good. The Central Huijins move showed the governments keen concern over tumbling bank shares and its strong support for the three banks," said Li Li, a China Chengxin senior analyst.

Guo Tianyong, a China University of Finance and Economics researcher, said the unilateral stamp tax would reduce the trading cost of purchasers and the tax cut showed the authorities had recognized some shares shrank too sharply.

Nevertheless, Chinese banks were not much affected by the credit market crisis that rattled global stock markets.

BOC, the countrys largest foreign exchange lender, said on Wednesday it had total exposure to failed U.S. investment bank Lehman Brothers of 128.82 million U.S. dollars, which accounted for 0.01 percent of the domestic lenders total assets.

ICBC said both its mainland and overseas branches held a total of 151.8 million U.S. dollars in bonds of or related to Lehman Brothers and it was considering to draw provisions for the said bonds.

SIGNAL OF FUTURE POLICY

"The latest stamp tax cut is a signal that the government will continue developing the capital market to boost the economy," Guo said.

The cut would also result in an even lower stamp tax revenue which had dropped by nearly 9 percent in August from a year earlier.

In addition, the countrys tax revenue growth declined 31.9 percent last month, according to the Ministry of Finance (MOF).

"But the move will boost market sentiment and restore investor confidence. This will help companies grow in the long run and bring more tax revenue for the country," said economist Bai Jingming with the MOF.