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Chinese stocks plunged 4.03 percent as panic grew among investors on expectation of a slash on interest tax likely to be passed tomorrow. The Shanghai Composite Index closed at 3,914.20, down 164.39 points, the largest single-day slump since June 4.

 

Lawmakers yesterday debated a bill authorizing the State Council to cut or suspend tax on interest accrued from bank deposits - a move seen as helping rein in excessive liquidity and expected to be passed on tomorrow's voting by the National People's Congress.

 

Analysts are divided on how much such a policy change will affect the stock market and whether today's plunge is caused by the news, but they agree it will draw money back to banks, and slow investors from pumping their funds into an overheated stock market.

 

Today's total turnover of the stocks enclosed by the two major indices was 191.9 billion yuan, the second-smallest since May 29, after June 14 with a 185.4 billion yuan turnover.

 

Like on most of the recent volatile trading days, the benchmark Shanghai Composite Index ran through the morning session in short-tailed fluctuations without forming a clear trend. After a higher opening from 4,080.19, the index hit the highest 4113.28, but failed to stay. In the afternoon, however, it met little resistance on a way of descending. Finally, it closed a little higher than today's lowest point of 3,912.81, again losing the 4,000-point mark regained just yesterday.

 

Of the A shares listed in Shanghai, merely 67 went up, 704 dropped and 68 finished unchanged. Shanghai Broadband Technology was up 29.15 percent on top of the gainer's list. Beijing Tianhong Baoye Real Estate and Jiangxi Hongdu Aviation Industry also grew nearly 10 percent as the biggest gainers. Zhejiang Furun, on the other hand, dropped 10.06 percent to lead the fall by the large number of losers today.

 

Inner Mongolian Baotou Steel Union became the largest trader in terms of trading volume, and rose 7.37 percent to 6.99 yuan. China Yangtze Power, with the largest transaction value, was up 6.03 percent. But the dual couldn't lift the index as other large traders were mostly dragging it down.

 

The Shenzhen Component Index, tracking the smaller Shenzhen Stock Exchange, opened lower from 13,544.06 and closed at 12,882.18, down 701.53 points or 5.16 percent. It went through the day within a range from 12,856.26 to 13,629.45.

 

Of its a shares, 500 fell, 79 ended flat and only 34 went up today. Beijing Centergate Technology Holdings rose over 10 percent to rank on top of the list for the second day while Jianmen Sugarcane Chemical Factory Group dropped more than 10 percent on the bottom. Sinopec Wuhan Phoenix, with the largest trading volume in Shenzhen, grew 1.68 percent while Shenzhen Development Bank, with the largest transaction value, slid as much as 6.64 percent, pressing the index down.

 

Stocks in the mining, paper production and food industries performed relatively better. Shanxi Xishan Coal and Electricity Power pioneered the mining sector in with a 0.92 percent surge.

B shares finished down. Of the 109 listed B shares, 91 went down and 10 ended flat. Anhui Gujing Distillery was again the biggest gainer. Closed-end mutual funds mostly fell in the plunging waves.

 

Besides a slash in the tax on interest, China is mulling a series of measures to address the excessive liquidity problem. The national legislature debated a draft bill authorizing the Ministry of Finance (MOF) to sell 1.55 trillion yuan of special treasury bonds to finance the proposed foreign exchange investment company. Analysts believe the issuance of the bonds may reduce liquidity in the market.

 

The funds raised will be used to buy US$200 billion of the country's total of US$1.2 trillion foreign exchange reserves from the central bank, and invested overseas. The bill, submitted by the State Council to the Standing Committee of NPC, is expected to be approved tomorrow.

 

New moves were made on the long-awaited financial futures. The China Financial Futures Exchange (CFFEX) yesterday said the China Securities Regulatory Commission has approved the trading rules, a crucial step toward the launch of the mainland's first index futures market.

 

CFFEX has said there is no specific target date for the launch, but industry insiders have predicted it will be sometime this year.

 

The approved trading rules cover trading practices, clearing procedures, members' rights and obligations, risk control, information management, hedging operations and the investigation of and penalties for irregular trading.

 

It is widely believed that the approval of the trading rules has cleared one of the final hurdles in the long preparation process that has tested the patience of many prospective participants, particularly institutional investors who would welcome an effective hedging instrument to minimize risks in an increasingly volatile stock market.

 

The central bank, on the other side, is concerned about inflationary pressure and is ready to make use of a range of monetary policy tools to curb prices rises, a senior official said yesterday. "The central bank is firm on keeping inflation under control," Yi Gang, assistant governor of the People's Bank of China, told reporters at a fiscal forum in Beijing. "We have many tools at hand," Yi added.

 

People have been expecting the central bank to raise interest rates or take other tightening measures to rein in rising prices. The central bank will make proper use of the tools to control inflation and keep price levels and economic growth stable, Yi said.

 

He added that increased asset prices would not be a factor in taking tightening measures. "We are mainly concerned with inflation, especially the consumer price index in China," he said. In the long run, the central bank aims to keep real interest rates positive, Yi said.

 

(China Daily June 28, 2007)