When the Chinese stock markets were first established, people made a lot of money. Friends tell me they not only amassed profit from their investment within days, even hours, but enjoyed far more fantastic returns. One gentleman friend from Shanghai made 36 times his original investment within only a few weeks.
But those days are long gone. Now, investors, Chinese and foreign, complain about the performance of the Chinese stock markets, and with good reason. At six year lows, both the Shanghai and Shenzhen benchmarks have, as the Asia Times notes, put in “disastrous” performances.
Ostensibly to rally the markets, the Ministry of Finance cut the tax on transactions in shares by a full 50%. And a minor rally was created, at least in Shanghai, which has since disappeared. In truth, the tax, beginning on January 24, 2004, decreased very slightly to 0.1% from 0.2% of A-share and B-share transactions.
This was window dressing, to say the least, and one hesitates to posit a reason for the implementation of this tax cut. Even Xinhua, the state media organ, had nothing positive to report about this latest attempt to bandage a gaping wound. For more background, see this article [Pay site.]
Apparently, there must be some contradiction somewhere. For while the stock markets flounder, inbound investment has soared to US$60 billion and 2004 M&A activity has grown by 50% over 2003.
Where is the money going and why not towards the purchase of the shares of publicly-listed companies? Several reasons are the cause of this amazing phenomenon, which we’ll discuss in our next post.
