South China Analysts Criticize Government's Handling of

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