VZCZCXRO1756
RR RUEHCN RUEHGH
DE RUEHGH #0165/01 1210954
ZNR UUUUU ZZH
R 300954Z APR 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6841
INFO RUEHBJ/AMEMBASSY BEIJING 1849
RUEHGZ/AMCONSUL GUANGZHOU 1189
RUEHCN/AMCONSUL CHENGDU 1218
RUEHSH/AMCONSUL SHENYANG 1216
RUEHHK/AMCONSUL HONG KONG 1349
RUEHIN/AIT TAIPEI 1028
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7391

UNCLAS SECTION 01 OF 02 SHANGHAI 000165 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR OASIA - DOHNER/CUSHMAN/WINSHIP 
TREASURY FOR AMBASSADOR HOLMER, DAN WRIGHT 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN; NEW YORK FRB FOR CLARK/CRYSTAL/DAWSON 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER, MCQUEEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV SOCI CH
SUBJECT: AUTHORITIES IMPLEMENT MEASURES IN ATTEMPT TO BOOST CHINA'S 
STOCK MARKET 
 
REF: A) Shanghai 28;  B) 07 Shanghai 325;  C) Shanghai 97 
 
¶1.  (SBU) Summary:  TDY Econ Officer solicited views on China's 
equity markets, particularly in light of recent measures to 
boost market performance, which highlight authorities' continued 
efforts to manage the domestic equity markets.  Two measures 
were implemented during the week of April 21, a reduction in the 
stamp tax on share trading and guidance on sales of non-tradable 
shares, which has pushed the Shanghai Composite Index (SCI) up 
19% through the close of trading on April 30.  These and other 
measures suggest authorities are increasingly concerned about 
the fall in the A-share market, which saw the Shanghai Composite 
Index decline 50% from its October 2007 peak (ref A).  Questions 
remain about the authorities' ability to "manage the market" 
over the medium term, especially given negative retail investor 
sentiment and slowing corporate profit growth.  End summary. 
 
-------------------------- 
Have Authorities Drawn a Line in the Sand? 
-------------------------- 
 
¶2. (SBU) In a widely anticipated move, Chinese authorities 
announced a reduction in the stamp tax from 0.3% to 0.1% after 
the market close on April 23 effective the following day.  The 
announcement followed guidance issued on April 20 by the China 
Securities Regulatory Commission (CSRC), designed to alleviate 
concerns over a potential share supply overhang related to 
non-tradable shares (NTS), which are able to convert to tradable 
status beginning this year.  The timing of the two measures 
suggests that policymakers are increasingly concerned about 
market stability, and may view both the 50% decline and the SCI 
3,000 level as important thresholds. 
 
¶3. (SBU) The decrease in the stamp duty is a reversal of last 
May's increase (ref B), enacted to stem what authorities viewed 
at the time as an already overheating market (the SCI quadrupled 
from May 2005 to May 2007).  In the past, authorities have used 
policy and moral suasion to guide the market, but were generally 
content to let the market run-up continue leading up to last 
fall's National Party Congress.  In the wake of the Party 
Congress, authorities attempted to manage the market down 
through window guidance and other measures.  However, concerns 
have grown in recent months that the adjustment process has 
gotten away from them.  Thus far in 2008, authorities have taken 
several steps to support the market, including approval of new 
domestic investment funds (in the past a successful way to boost 
the market), expanded quotas for foreign portfolio investment 
(QFII), suspension of corporate income taxes on mutual fund 
income and tighter regulation of new share issuance.  Despite 
these measures, the market was down 41% year-to-date prior to 
the implementation of the most recent measures. 
 
¶4. (SBU) Press reports and market speculation suggest that 
authorities may introduce additional measures soon.  Most 
reports focus on the possibility of the launch of margin trading 
and the long-delayed stock market index futures (ref C) over the 
May Day holiday.  Despite almost two years of mock trading and 
the issuance of futures licenses to brokers, final approval of 
index futures by the State Council has remained on hold given 
government concerns over short-selling in an already fragile 
market. 
 
¶5. (SBU) Notably, these measures represent the first significant 
moves made by authorities since Wang Qishan was elevated to Vice 
Premier in charge of the financial portfolio at the National 
People's Congress in March.  Vice Premier Wang's reputation for 
tough decision-making, including his refusal to support the 
troubled Guangdong International Trust and Investment 
Corporation (GITIC) as Vice Governor of Guangdong Province in 
1998, had generated debate in the press over his willingness to 
"rescue the market."  However, Shanghai-based financial sector 
analysts suggest that these recent measures may reinforce a 
perception among investors that the government will intervene to 
support the market, particularly in advance of the Olympics in 
August and despite limited reported incidents of social unrest 
related to the market sell-off. 
 
 
SHANGHAI 00000165  002 OF 002 
 
 
¶6. (SBU) In terms of the share supply overhang, the investment 
bank UBS estimates that up to RMB 1.5 trillion ($220 billion) in 
NTS will "unlock" (convert to tradable status) in 2008.  Almost 
half the total conversion is set to occur in August (RMB 400 
billion, $57 billion) and December (RMB 300 billion, $43 
billion).  The amount scheduled to "unlock" next year is even 
larger, with over RMB 600 billion ($86 billion) set to convert 
in September 2009 alone.  The new NTS guidance states that 
holders of "unlocked" NTS seeking to sell 1% or more of a 
company's total shares within a one-month period must do so via 
privately negotiated block sales.  In addition, controlling 
shareholders cannot transfer or sell unlocked NTS in the 30 days 
prior to the company's semi-annual or annual financial results. 
With these measures, authorities aim to reduce share price 
volatility, so that large block sales and sales by insiders 
during earnings reporting season will not impact open market 
trading.  Although the size of the share overhang has clearly 
weighed negatively on market sentiment, one investment advisor 
in Shanghai argued that much of this fear is overblown since 
A-share listed companies' parent groups still control the 
majority of unlocked NTS and are reluctant to sell given that 
parent groups 1) do not have an immediate need to raise cash and 
2) currently view their companies' share prices as undervalued. 
 
-------------------------- 
Concerns Remain in the Market 
-------------------------- 
 
¶7. (SBU) While the market jumped 9% on April 24, the largest 
one-day gain in over six years, following the cut in the stamp 
tax and is up 19% since April 18, it remains to be seen whether 
the authorities will succeed in halting the broader secular 
decline seen since October given slower retail investor demand 
and the prospects for slowing corporate earnings.  Some market 
participants are skeptical. One Shanghai-based fund manager 
noted that all of the 36 new mutual funds approved by the CSRC 
since February have been small and retail investor interest has 
been tepid.  Concerns are also growing around firms' ability to 
maintain profit growth, especially in an environment marked by 
tighter policy measures and rising input costs. 
 
¶8. (SBU) This has led some analysts to highlight that valuations 
of A-share-listed companies remain rich at roughly 28 times 
earnings compared with H-shares (19 times).  Among cross-listed 
companies, the average premium for A-shares relative to H-Shares 
stands at just under 40%, down from almost 50% in late March but 
still underscoring the relative valuation gap.  However, 
A-shares for some large financial firms (Bank of Communications, 
Ping An Insurance, China Life Insurance) now trade at or below 
par with their cross-listed H-shares.  As of the market close on 
April 30, H-shares have fallen 30% year-to-date compared to a 
12% decline in the A-share index. 
 
¶9. (SBU) Comment:  If the market resumes its sell-off, Chinese 
willingness to promote domestic capital market reform could be 
adversely impacted.  On the other hand, continued government 
intervention to support the market creates moral hazard and 
reinforces the view that the stock market remains a "policy 
market." 
JARRETT