After months of heated debate, the Ministry of Finance cut the stamp duties on transactions of both Chinese-only A shares and the hard currency denominated B shares to 2 ?, effective Friday. The news came after the markets closed Thursday.

That is the lowest level since they were introduced a little more than 10 years ago. The current trading levy, imposed on both buyers and sellers, was 4 ? for A shares and 3 ? for B shares.

"It's primarily a signal from the government,'' said Gao Huiqing, a researcher with the State Information Centre. "They are telling investors that they don't want the market to slide further.''

China's A- and B-share markets have lost around 30 percent of their market capitalization since a peak on June 14, primarily due to the government's sweeping clampdown on fraud and illegal capital sneaking into the market. Worries about a flood of domestic A-share issues and the selling of State-held shares to investors at high prices also depressed the markets.

"It means the government is giving up part of its revenues to investors,'' said Zhou Ling, a manager at Haitong Securities. "It's sure good news for investors.''

Sluggish turnover has already eroded proceeds from stamp duties, a major contributory for the revenue growth in 2000, which shrank by 37 percent year-on-year in the first three quarters to 24.4 billion yuan (US$3 billion).

Theoretically, trade volumes would have to double for A shares to offset the losses from lower rates. That hardly seems possible given the current circumstances, said He Zhenyi, a senior economist with the Chinese Academy of Social Sciences (CASS).

"But if it's what the macroeconomic situation requires, sacrifices in tax revenues are worthwhile,'' he said.

He said lowering the stamp duty also brings it closer to the levels in other nations, which is necessary after China joins the World Trade Organization.

While it surely lowered trading costs for investors, insiders say the long-awaited trim may be good news more for the country's struggling brokerage companies as it means lower costs in proprietary trading and more commissions.

Inert trading this year had pushed many securities firms, which rely heavily on commissions, to the brink of bankruptcy and to lobby policy makers for help, Gao said.

"This may mean their (lobbying) work has paid off,'' he said. "And now they get a respite.''

Brokers are less sanguine about the move, downplaying the effectiveness of a tax policy change in a market crowded with loss-making firms and plagued with fraud.

"If the quality of listed companies don't improve, and the expectations (for annual financial results) are low, I don't think investors will be more active,'' Zhou said.

China's listed firms are expected to release annual reports starting January 1.

Even worse for brokerages, Zhou said, the move may herald an unwanted cut in the commission rate, currently at 0.35 percent, which investors have also been fretting about.

(China Daily November 16, 2001)