VZCZCXRO9315
OO RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0655 1590625
ZNR UUUUU ZZH
O 080625Z JUN 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6135
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEHRC/USDA FAS WASHDC 0961
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS GUANGZHOU 000655 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON CH
SUBJECT: South China Analysts Criticize Government's Handling of 
Stock Markets 
 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) SUMMARY: In the aftermath of the plunge in stock prices on 
the mainland, South China commentators and academics complain that 
central authorities showed a disappointing, but all too common, lack 
of transparency before unexpectedly tripling the stamp duty on share 
trades on May 30.  Analysts generally believe the measures will have 
a short-term impact: they may have helped correct the markets for 
now, but similar measures in the future could well undermine the 
government's credibility on stock-related (and perhaps other) 
issues.  END SUMMARY. 
 
Stocks Dive After Stamp Duty is Raised 
-------------------------------------- 
 
¶2. (SBU) The events of May 30 are already well known: the stamp duty 
paid on share trades was increased from 0.1 percent to 0.3 percent, 
sending stocks in the Shanghai and Shenzhen exchanges into a rapid 
fall.  Within four trading days, stock market capitalization 
reportedly decreased by 17 percent.  To boost confidence, three 
major securities newspapers published front-page editorials on June 
4 calling on investors to take a long-term view.  Although stocks 
rebounded slightly on June 5 and 6, the number of new trading 
accounts is still a fraction of the April peak.  Hong Kong-based 
Goldman Sachs economist Enoch Fung told Congenoff that investors 
were comforted in part by recent signals in the state media that a 
proposed capital gains tax would be delayed until next year. 
 
Poor Transparency 
----------------- 
 
¶3. (SBU) Criticism of the government's actions by South China 
newspapers and academics has largely focused on the government's 
lack of transparency.  Newspapers have quoted investors saying they 
were angry not with the stamp duty, but the way it was introduced. 
(On May 22, a week before the duty was imposed, officials from the 
Ministry of Finance denied that they were considering such a move.) 
Zhongshan University Finance Professor Lu Jun told us that the 
government's reversal reflected poorly on the Ministry of Finance, 
indicating that it was not capable of dealing with increasingly 
complex economic situations.  Goldman Sachs' Fung said the reversal 
had eroded some of the government's policy credibility.  Hong Kong's 
South China Morning Post reported that mainland participants in 
internet chat rooms were openly critical of the government's actions 
and compared the fallout to a flash flood. 
 
A Long Term Impact? 
-------------------- 
 
¶4. (SBU) Though some newspaper commentators have warned that the 
stamp duty may inadvertently lead to a deep freeze in the stock 
markets, most see this as a severe but short-lived dip in the 
market.  Guangzhou's Nanfang Daily quoted Cheng Weiqing, an analyst 
from Citic Securities, as saying that no major damage would result 
from the sell-off; he pointed out that the United States and Japan 
had seen larger dips and recovered well.  Peng Yanping, Director of 
Citic Securities Reseach Center, compared the stamp duty to a fuse 
that sparks an explosion, but said he this was a necessary 
correction.  Zhongshan's Professor Lu said investors would quickly 
forget the pain of this plunge and return to the markets.  He added 
that the Chinese government's recent move was born out of larger 
concern about social instability, and the impact of an 
out-of-control stock market and the resulting crash. 
 
The Danger of Future Fluctuations 
--------------------------------- 
 
¶5. (SBU) Some analysts warned that similar, unexpected government 
actions in the future would undermine the stable growth of China's 
securities sector.  Newspaper commentators said that the speculative 
retail investors who temporarily fled the market were likely to 
return.  They worry that future unexpected corrective measures by 
the government will cause institutional investors to pull out their 
money.  Guangzhou's Southern Metropolis Daily reported that many 
local investors had decided to take their money to banks instead. 
The Guangzhou branches of China Everbright Bank, China Minsheng 
Bank, and Shenzhen Development Bank reported significant growth in 
their RMB investment banking products business since the plunge 
began last week. 
 
GOLDBERG