Tuesday, June 05, 2007

Chinese Stocks : Rebound from Free Fall

China's stocks have been in a virtual free fall since the government tripled the tax on securities trading on May 30. The slide has wiped out more than $500 billion of market value - more than the combined GDP of Taiwan and Singapore.

The benchmark Shanghai index closed more than 8% lower on Monday on concerns that the government is set to launch further measures to cool the gravity-defying rise, including a capital gains tax. On Tuesday, a late rally saw the market rebound to finish more than 2.5% higher after a volatile day of trading that saw a 7% decline earlier in the day.

In an apparent bid to reassure investors, editorials in official newspapers have said that the market's medium- and long-term outlook was still positive, and that the tax hike was merely aimed at speculators. Terming the fall as a healthy short-term correction that won’t hurt the “bull run”, the newspapers have advised investors to take a long-term view of the development of the Chinese capital markets and the importance of the financial reforms.

The meteoric rise of the Chinese stock market has led to widespread fears of a bubble-in-making and warnings of dramatic corrections. Significantly, global markets, which were shaken by a heavy Chinese market sell-off in late February, appear relatively calm to the latest meltdown.

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