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China shares drop as Beijing seeks to cool markets

"If prices were to continue to rise rapidly, risks of a sudden change in mood and sharp negative correction could increase."

World Bank report

Chinese share prices slumped 6.5 percent yesterday after taxes on share transactions were raised in the government's latest effort to curb the nation's booming stock markets, dealers said.

The benchmark Shanghai Composite Index, which covers both A- and B-shares listed on the Shanghai Stock Exchange, ended down 281.84 points at 4,053.09 on a record turnover of 271.29 billion yuan (US$35.23 billion).

The Shanghai A-share Index was down 294.48 points or 6.48 percent at 4,250.00 on turnover of 267.45 billion yuan and the Shenzhen A-share Index fell 96.74 points or 7.15 percent at 1,256.35 on turnover of 133.77 billion yuan.

The fall came after the Ministry of Finance announced after midnight on Tuesday it was raising the stamp tax on stock trades to 0.3 percent from 0.1 percent in what Xinhua News Agency said was an effort to cool the market.

The World Bank warned yesterday that the risk of a sharp correction in China's stock market could rise if prices continued to soar, but argued the impact on the overall economy would be limited.

"If prices were to continue to rise rapidly, risks of a sudden change in mood and sharp negative correction could increase," the World Bank said in its quarterly update on the Chinese economy.

"The main impact could be damage to the new-found confidence in the Chinese capital market," it said.

China's stock markets have tripled in value since 2005 and raised fears of a major correction.

However, the World Bank argued the impact on the real economy via reduced consumption and investment was likely to remain limited.

The reason is that the total value of stocks held by individual investors is no more than one sixth the overall Chinese gross domestic product, the World Bank said.

In addition, the exposure of the banking system to the stock market, directly or indirectly, seems limited, it said.

It cited an estimate from a state think tank that the exposure could add up to 300 billion yuan, which is a modest one percent of the total deposit base and 5.5 percent of stock market capitalization of tradeable shares.

"Nevertheless, large losses of financial wealth for specific groups, especially vulnerable groups like retirees and low income earners, could be a policy risk," it said.

"It could lead to pressure to bail them out, resulting in fiscal costs on the one hand, and moral hazard on the other," it said.

The World Bank raised its forecast for China's economic growth this year to 10.4 percent from an earlier 9.6 percent and urged Beijing to reduce its reliance on exports by boosting domestic consumption.
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