Analysts believe price correction is inevitable, even if there were no such a stamp tax hike. Bubbles in deed existed in the stock market. The latest data showed that in May there had been 29 stocks with price to earnings (P/E) ratios higher than 1,000 in the Shenzhen bourse, compared with only three stocks in January.

Chongqing Yukaifa and Yantai Dongfang Electronics Information Industry had P/E ratios at 8,000, followed by ST Anhui Feicai Vehicle with P/E ratio of 3,850. Five stocks had P/E ratios between 2,000 and 3,000 and the rest 21 between 1,000 and 2,000.

Many investors fear China may impose a capital gains tax to cool an "overheated" stock market. But legal experts think it is impossible that such a tax will be issued overnight like the stamp tax hike, according to the Shanghai Securities News.

"Based on the State Council's 1988 Provisional Rules for Stamp Tax, adjustment in the stamp tax rate may be decided by relevant government bodies," said a source. "But the capital gains tax is a completely new tax. There are no legal grounds for it now. It needs to go through a full procedure of legislation before it is for approval by the taxation authority."

The National Council for Social Security Fund is considering requiring State-owned enterprises to pay dividends from profits to the Social Security Fund (SSF), according to Gao Xiqing, vice chairman of the council. Gao added that SFF believes China's stock market has a good prospect and will set aside a large portion of the fund for equity investment.

Central bank vice governor Wu Xiaoling said on the sidelines of a financial forum held in Tianjin yesterday that the recent turmoil in the stock market is not detrimental enough to affect the Chinese economy.

Wu stressed the importance of a stable and healthy capital market to the country's economic growth. All the central government did were for the long-term development of the market, she said. Investors should build up or recollect their confidence in the economy and the stock market. They should also understand the goodwill by the regulators and improve abilities of risk assessment and control, she added.

Wu also suggested allowing financial institutions to get involved in private equity business. The Partnership Enterprise Law to be enacted this month will introduce partnership into the formation of companies in China and pave the way for commercial banks, insurers, pension funds and other financial companies to participate in private equity investment funds. The supervisor should amend the current laws and regulations accordingly to facilitate the involvement of financial institutions in such businesses, said Wu.

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