(China Daily)
Updated: 2007-05-31 06:58

It should be no surprise that the domestic stock markets finally plunged yesterday after the government tripled the stamp duty on shares traded.

The benchmark Shanghai Composite Index dropped 6.5 percent to close at 4,053, the sharpest fall in three months.

Clearly, the increase in the stamp duty from 0.1 percent to 0.3 percent delivered immediate results in slowing the seemingly unstoppable bull market. China's stock market has soared more than 60 percent so far this year on top of a 130 percent increase in 2006.

To promote the healthy development of the securities market, the Chinese authorities need to continue to take all necessary measures to prevent a stock bubble.

The hike of the stamp duty is the latest in a series of efforts.

Two weeks ago, the central bank raised interest rates for the second time this year, trying to encourage people to save rather than invest in stocks. A few days later, the securities regulators ordered brokerage firms to help educate individual investors on market risks. At the same time, the regulators increased efforts to crack down on insider trading.

All these measures are directed at the root cause of the current stock boom. A higher interest rate will rein in the excess liquidity that has, to a large extent, fueled the rally. Tightened regulation is essential to curb the speculation that runs rampant in an overheated market.

Yet, these previous measures failed to discourage investors. It was reported that the number of brokerage accounts passed the 100 million mark for the first time early this week.

Previous measures' failure makes the increased stamp tax look particularly effective.

The authorities may have finally driven home their message to investors.

However, even with this breathing space, policymakers should not take for granted a desired correction in the domestic stock market.

The bullish market can continue and even accelerate if other measures are not quickly put in place.

The tax hike will further increase national revenue at the expense of investors. The authorities should demonstrate continued concern in cooling the market to avoid the impression of striving for benefits with investors.

(China Daily 05/31/2007 page10)