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China's stock market, after experiencing its sharpest daily fall in 10 years, saw a rebound of nearly 4 percent yesterday as the government allayed fears of a new capital gains tax.

 

The Shanghai Composite Index, which plummeted 8.84 percent on Tuesday, closed 3.94 percent higher at 2,881.073 in heavy trade.

 

"Tuesday's move was profit taking, not a fundamental shift in sentiment," said Stephen Green, senior economist at Standard Chartered Bank in Shanghai.

 

Meanwhile, officials at the Ministry of Finance and the State Administration of Taxation said the government would not impose a capital gains tax on stock investments. Analysts believe the rumor was the catalyst for the big drop on Tuesday.

 

Premier Wen Jiabao said yesterday the government would protect the safety and stability of financial markets, according to Xinhua News Agency.

 

As China's major stock index recovered about half of Tuesday's losses, the rest of Asia fell yesterday.

 

"Tuesday suggested to some that China's stock market and the world's are now fundamentally linked; today's action pours cold water on that theory," Green said.

 

Although most analysts and economists are optimistic about the long-term performance of China's stock market, some analysts are forecasting more corrections.

 

"We see another 15 to 20 percent correction of the A-share index as is necessary and healthy," said Ma Jun, chief economist with Deutsche Bank (Greater China).

 

Dong Chen, a senior analyst with CITIC China Securities, said there will certainly be more sharp ups and downs in the market this year, so investors had better fasten their seatbelts.

 

He added Ping An's performance today would have limited impact on the market.

 

The country's second-largest insurer will make its debut on the Shanghai bourse today, raising 38.87 billion yuan (US$5.02 billion) with an initial offer price of 33.8 yuan (US$4.3) per share. It is the second mainland insurer to list after China Life.

 

"If Ping An shares open lower than 45 yuan (US$5.8), it will still have enough growth potential, and could help lead upward momentum in the financial sector," Dong told China Daily. "But if the debut price is above 52 yuan (US$6.7), there may be more downward pressure, and it's likely to trigger a slide in financial shares."

 

The insurer said it would issue about 1.15 billion yuan-denominated A shares, accounting for 15.66 percent of the insurer's expanded stock of 7.345 billion shares.

 

Premier Calls for More Financial Reform

(China Daily March 1, 2007)