VZCZCXRO9752
RR RUEHCN RUEHGH
DE RUEHGH #0325/01 1501039
ZNR UUUUU ZZH
R 301039Z MAY 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5875
INFO RUEHBJ/AMEMBASSY BEIJING 1131
RUEHCN/AMCONSUL CHENGDU 0685
RUEHGZ/AMCONSUL GUANGZHOU 0667
RUEHHK/AMCONSUL HONG KONG 0795
RUEHIN/AIT TAIPEI 0559
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6282

UNCLAS SECTION 01 OF 02 SHANGHAI 000325 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EEB, 
STATE PASS USTR FOR STRATFORD, WINTER, MCCARTIN, ALTBACH, READE 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/GLICK/LUNG; NEW YORK FRB FOR CLARK/CRYSTAL/MOSELEY 
STATE PASS CFTC FOR OIA/GORLICK 
CEA FOR BLOCK 
USDOC FOR ITA DAS KASOFF, MELCHER AND OCEA/MCQUEEN 
TREASURY FOR OASIA - DOHNER/CUSHMAN 
TREASURY FOR IMFP - SOBEL/MOGHTADER 
NSC FOR KURT TONG 
 
E.O. 12958: N/A 
TAGS: EFIN EINV PREL CH
SUBJECT: STOCK MARKET TOO HOT, SO CHINA RAISES TAXES 
 
REF: SHANGHAI 174 and previous 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels. 
 
¶1. (SBU) Summary:  The Ministry of Finance (MOF) announced on 
May 29 that the stamp tax charged on every stock trade would 
rise from .1 percent to .3 percent of the total value of that 
trade, effective May 30.  Consulate contacts and industry 
analysts said this was a further attempt to cool down China's 
overheated equities market, but would have little long-term 
effect.  This increase in taxes on trades came about ten days 
after every brokerage in China, apparently in concert, raised 
its commission rates from an average of 12 basis points to 23 
basis points.  The government's hope in increasing the stamp tax 
was to reduce the volatility and instability caused by 
speculative investors who held stocks only for short periods and 
had been "stir frying" their portfolios.  At least in the 
short-term, government revenues were set to boom, with USD 108 
million of stamp tax generated on May 30 on the Shanghai Stock 
Exchange (SSE) alone, compared to the mere USD 36 million that 
would have been generated on the same trading volume under the 
prior rates.  The market closed down 6.5 percent on May 30, 
having set a new trade volume record with more than USD 35 
billion worth of stocks changing hands.  End summary. 
 
¶2. (SBU) MOF announced May 29 that it would increase its stamp 
tax on securities trading from .1 percent to .3 percent of the 
value of each trade, effective May 30.  (Note: MOF had denied 
rumors on May 23 that it was considering such an increase.  End 
note.)  Official press reports stated that this tax rise had 
been approved by the State Council and was "intended to help 
promote the healthy development of the securities markets." 
This move came on the heels of the May 18 increases in bank 
reserve requirements and interest rates.  These policy steps 
were all aimed at trying to cool down the overheated equities 
market (Ref A), according to industry analysts and Consulate 
contacts. 
 
--------------------------------------------- ---- 
"The State Council Wants to Cool Down the Market" 
--------------------------------------------- ---- 
 
¶3. (SBU) SSE Deputy Director Chao Kejian told Econoff on May 30 
that the SSE Composite Index had risen by more than 60 percent 
this year, on top of its 130 percent rise last year.  Raising 
and lowering the stamp taxes on trades was something that MOF 
had done at least six times since stock trading began in 1990, 
he said.  Raising and lowering the costs of trading had been 
used to either encourage or discourage trading, he added.  This 
rise was because "the State Council wants to cool down the 
market."  At .1 percent, China's taxes on equity trades were 
already among the world's most expensive, he said; raising them 
to .3 percent was "not reasonable." 
 
¶4. (SBU) Like the recent increase in interest rates, Chao said 
he did not think that the increasing the stamp tax would have 
its desired effect.  "It might work for three to four days, 
maybe a week," he said.  But in the long term this step would 
"not be effective." 
 
-------------------- 
Stop the Stir-Frying 
-------------------- 
 
¶5. (SBU) Z-Ben Advisors Principal Peter Alexander's forecast for 
the effectiveness of this most recent cooling measure was the 
same as SSE's Chao.  In a separate meeting on May 30, Alexander 
told Econoff that increasing the stamp duty from .1 percent to 
.3 percent per value of a trade "should have a limited impact on 
market sentiment."  This would, however, be "great for the 
government's bottom line, in that revenue will be exponentially 
higher."  Alexander noted that based upon a conservative daily 
trade volume of RMB 200 billion per day (USD 26 billion/day), 
 
SHANGHAI 00000325  002 OF 002 
 
 
tax receipts will go from RMB 200 million (USD 26 million) to 
RMB 600 million (USD 78 million) per day.  (Note: SSE's Chao had 
earlier told Econoff that this measure would increase the 
government's tax revenue by RMB 60-80 billion (USD 8-10 billion) 
this year.  End note.) 
 
¶6. (SBU) Pointing to steps that the central government had made 
in previous years to slow down the housing market as a model for 
what it is doing now, Alexander said that the government was 
"attempting to reduce activity without reducing the market's 
level."  What the government was most concerned about, he said, 
was the uncertainty and instability in the market caused by 
short-term speculative trading.  This was referred to as 
"stir-frying stocks" (chao gu) in Chinese, he said. 
 
----------------------------- 
Brokerages Will Feel the Pain 
----------------------------- 
 
¶7. (SBU) Shenyin & Wanguo Securities Company Deputy Director Li 
Qinghai told Econ Assistant on May 30 that although the stamp 
tax raise was aimed at curbing short-term speculative trading in 
the equity market, it would, in the long run, hurt securities 
firms since the higher stamp tax would decrease trade volume. 
Since securities brokers charged very low fees, their incomes 
were dependent on high trade volumes.  Nonetheless, Li's view 
was that the overall bull market conditions had not changed. 
 
¶8. (SBU) SinoPac Securities Investment Manager Rafe Xu 
separately told Econ Assistant on May 30 that this tax hike, 
when combined with the increased brokerage commission costs, 
greatly increased an individual investor's transaction costs. 
(Note: According to Z-Ben Advisor's Alexander, about ten days 
ago, every security house simultaneously had raised its 
commissions from an average of 12 basis points to 23 basis 
points.  While there had been no public announcement that the 
brokerages were acting on government instruction, "You do the 
math!" said Alexander.  End note.)  These increased transaction 
costs would have a "strong negative impact on the market," said 
Xu.  He also speculated that the numbers of new investors 
opening trading accounts would decline as well. 
 
--------------------------------------------- -- 
Market Responds with Record Volume; Trades Down 
--------------------------------------------- -- 
 
¶9. (U) According to market information, investors in stocks 
listed on SSE responded to the increased tax on stock trades on 
the morning of May 30 by conducting a record number of trades. 
Total value of shares traded in the morning session (from 9:30 
AM until 11:30 AM) was RMB 181 billion (USD 24 billion); the 
market traded lower by 6 percent.  The previous record volume 
for a whole day's trading was 261 billion, set on May 24. 
(Note: At 0.3 percent per trade value, the Chinese government 
collected USD 72 million in tax revenue from the morning session 
alone.  End note.)  For the day, the market closed down 6.5 
percent with 730 companies trading lower and only 43 companies 
trading higher.  Total volume on May 30, both afternoon and 
morning trading sessions, was RMB 272 billion (USD 36 billion), 
a new record. 
JARRETT