Beijing Moves to Revive Stock Markets

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Investors look at the electronic board at a brokerage house in Hangzhou, Zhejiang province, China.

How do you manage a stock market full of neophyte investors? Very carefully, China is learning. After regulators put a trading tax in place last May, the market plunged by 10.3% in the space of a week. And for many investors, that was a rude introduction to the basic lesson that what goes up can also come down. Li Xiuzhen, 58, a retired factory worker from Beijing and newbie stock buyer, says her investment fund has shrunk by 40%. Li, who receives monthly pension of $171, has lost $8,571 in recent months. "China's stock market is the biggest gamble," she says. And lately, it's been a losing bet.

Now, regulators are taking steps to turn things around. Late Wednesday, the Chinese government announced to a cut in the stamp-duty tax imposed on stock transactions, from 0.3% to 0.1%, and Thursday's market surged by 9.29%, its biggest gain in six years.

The transaction-tax cut was the second government move in four days aimed at stimulating a market that has lost almost 50% of its value from its peak last October, erasing $2.5 trillion of its capitalization. On Sunday night, the China Securities Regulatory Commission (CRSC) announced long-waited new rules to allow limited sales of previously non-tradable equities held by big investors in listed firms. But it was the transaction-tax cut that got the market climbing again. "The tax drop is an important signal of the government's resolve to salvage the market," says Dong Tao, chief regional economist at Credit Suisse in Hong Kong. "The financial benefit investors are getting from the new policy is trivial, but the reassurance from the government is big."

But China's small investors might need a lot more to be reassured. In the CITICS stock market, the mood is boisterous but uncertain. Fang Lin, 66, thinks the market is going to go down very quickly. "I will sell all my stocks this afternoon, even though I will still lose money." Like Fang, millions of Chinese small investors have put their life savings into the market that has risen 600% over the last two years. Dong Tao says: "Many Chinese investors used to think China's stock market is like an ATM machine. You type your password in and money comes out." Not anymore. The decline of China's stock market sped up this January, and it fell straight through the past three month by 43%.

Still, despite the recent drop, analysts are optimistic. "The government does not want to see the worsening market start to bring about negative impact on China's economy and social stability," Dong Tao says. He believes the government wants to see the market rise steadily, but slowly, for the next few months. "Last May's tax increase unveiled the beginning of decline. Therefore the tax cut yesterday might as well be an indicator for the start of rise. If the market doesn't respond to the tax drop, more policies are bound to be issued," he says. As to the still-depressed small investors, "As long as the market continues to go up, people will rush back in," Tao says. "After all, money has a short memory."

Not everyone is in a hurry to return, however. Lu Fanglin's investment last August brought him more pain than profit. Over six months, his investment in the stock market shrank from $28,500 to $17,100. He pulled out completely in January. "Anyone who has gone through the last few months could feel nothing but hopeless," Lu says. "I won't get near to the stock market for the rest of my life."