Chinese govt. buys bank shares, drops tax on stock trading

By Nipa Piboontanasawat and Wing-Gar Cheng
Bloomberg News
Friday, September 19, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=azK0n73WyuOc&refer=home

China will scrap the tax on stock purchases and buy shares in three of the largest state-owned banks to shore up investor confidence in the world's second- worst-performing stock market this year.

China Investment Corp., the nation's $200 billion sovereign wealth fund, will buy stakes in Industrial & Commercial Bank of China Ltd., Bank of China Ltd., and China Construction Bank Corp., the official Xinhua News Agency said yesterday. The 0.1 percent stock transaction duty will be removed for purchases and levied only on sales starting today, it said.

The Bank of New York Mellon China ADR Index surged by a record 12 percent, foreshadowing gains in China-related stocks today. The benchmark CSI 300 Index slumped 65 percent this year as an equity bubble deflated and the economy slowed, hurting earnings. Industrial & Commercial Bank on Sept. 17 ceded its position as the world's most valuable bank to HSBC Holdings Plc after shrinking by $241 billion in less than a year.

"The stock market has fallen too much," said Frank Gong, chief China economist at JPMorgan Chase & Co. in Hong Kong. "There will be more measures to support the economy, like fiscal stimulus and easing of monetary policy."

The measures come after China's central bank cut interest rates on Sept. 15 for the first time in six years and allowed most banks to set aside smaller reserves.

The government failed to halt the market's slide this year after cutting stamp duty from 0.3 percent on April 23 and restricting share sales. The CSI 300 surged almost sevenfold between July 2005 and its peak on Oct. 16 last year, becoming the world's most expensive market relative to earnings.

"They've used the stamp duty before," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "What's different this time is the decision to let CIC to buy bank shares, which will be more effective in saving the market. This will help put a floor" under the market, he said.

CIC's unit Central Huijin Investment Co. will begin buying shares in the banks in the secondary market immediately, according to the Xinhua announcement. The agency didn't say how much Central Huijin, which already controls the nation's largest banks, may invest or give further details.

Chinese stocks rebounded in the afternoon trading session yesterday after plunging earlier. ICBC's Shanghai-traded shares closed 0.6 percent higher after tumbling as much as 8.5 percent. Bank of China rose 2.7 after earlier dropping 5 percent and China Construction Bank closed 0.5 percent lower after losing 9.7 percent.

China's banks mostly avoided the credit-market crisis that has rattled global stock markets, accounting for less than 1 percent of the $516 billion of losses and writedowns worldwide. ICBC earned a record 64.5 billion yuan ($9.42 billion) in the first half to become the world's most profitable bank.

Still, ICBC shares have fallen 58 percent this year in Shanghai, while Construction Bank has slumped 61 percent and Bank of China is down 54 percent.

Failure to stem the slide in China's stock market puts corporate earnings at risk. A fifth of profits at Chinese companies in 2007 were from investment gains, according to the finance ministry. The 1,570 companies listed on the Shanghai and Shenzhen stock markets reported a 50 percent increases in profit last year, it said.

"This move signals the government's more proactive approach towards restoring market sentiment," said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan. "Going forward, additional measures to boost the market could include the establishment of a stabilization fund for the domestic market and further reform of the rules pertaining to the sale of previously non-tradable shares."

JPMorgan analysts were ranked the best China researchers by Institutional Investor magazine's fund manager survey this year.

The Ukraine PFTS Index is the worst-performing of 88 benchmark indexes tracked by Bloomberg.

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