Reading between the lines: China's tripled stamp duty

[31 May 2007: Corrected version]

Mr. Xiang Huaicheng, former Minister of Finance and current Chairman of the National Council for Social Security Fund recently commented on the stock market craze with a “beer bubble” analogy, saying beer would not be as tasty without bubble. Market well received his message as an indication that the government would not impose drastic measures to cool down the market.

To most people’s surprise Ministry of Finance made an announcement very late last night that the stamp duty would be trebled. So is Chairman Xiang’s message inconsistent with that the action from Ministry of Finance?

To interpret that let’s first look at the related entities under the Chinese government structure:



MoF, CSRC, CBRC, Social Security Fund and PBoC are entities all directly reporting to the State Council, that is to say heads of those entities are at same rank within the government structure and each entity is supposed to have its own authority to impose new policy within its scope of responsibility, that explained the action of MoF last night.

Having said that, as action from each entity would also have significant impacts to China’s economic well being, I would tend to believe they would work very closely while independently and communicate with each other before any new policy or significant change in policy is announced to public. So I suspect Chairman Xiang was well aware of MoF’s action beforehand though he might not know the exact announcement date, he didn’t see that as drastic measure at all and that’s why he talked about his ‘beer bubble’ theory just one week before MoF’s action.

Let’s also look at the timing of last night's MoF announcement. It was announced at almost midnight on a Tuesday while most announcements of this type were made on Friday after market or right before or during a long holiday so that public can have time to digest such announcement to avoid irrational impulsive market behaviour. On the contrary, this time MoF deliberately made the announcement at such an unconventional timing in order to encourage impulsive market reaction. That was very effective and caused the market to drop by 6% in both Shanghai and Shenzhen. I would say such market behaviour was irrational because what impact in absolute sense is the 0.2% tax increase when the market has been going up at a rate several order of magnitude faster than that?

MoF’s objective is to cause a sudden abrupt change in market direction in order to give a more remarkable signal to the market participants that the government can and will do something if necessary. However, as the real impact is minimal, I foresee the market will totally recover in no more than a few days.

The ‘beer bubble’ analogy from Chairman Xiang and MoF’s deliberate choice of timing together made me believe the government really would not want to cause the market to correct drastically while occasional correction of 10% or so would be expected.

I take this as a good buy opportunity and I've bought some CAF while writing this article. The discount gap of ~20% between CAF vs. A-50 tracker (2823.HK) is too attractive to miss.


Disclosure: I have a long position in CAF