Cover editorial, issue no. 365, April 28, 2008
Original article: [Chinese]

One day after the Chinese State Council announced a cut in the share trading stamp tax to 0.1% from 0.3% on April 23, both the Shanghai and Shenzhen stock indexes soared, with the former registering a 9.29% jump.

Market observers believed the Chinese government's move was a reaction to calls for "rescuing the market", and thereafter, market sentiment brimmed with optimism as many believed more supportive measures were in the pipeline.   

To this end the move was misunderstood. The stamp tax cut is no doubt a positive signal; however, as regard to whether or not to rescue the market, the government has remained silent.

We have argued before that the core of the issue is not about "rescuing the market", it is about clarifying the role of a government in a market economy. When analyzing the government's moves, we must look at the reasoning behind them, and if it is in favor of sound market development and stable macro-economic growth.

The stamp tax cut has nothing to do with rescuing the market, but it is about a government's responsibility. As a supervisor and a regulation-maker, it is the government's duty to keep the costs of trading low. The Chinese securities trading has long been known for its high tax burden, and if the tax cut is in line with the public's sentiment, facilitating trading and promoting a healthy growing market, what is stopping the government? 

The government knew well of the move's benefits yet hesitated in the past to implement it, partly due to concern of it being labeled as a market intervention. The present move can be been as a new chapter in government-market relationships, as the former has brought the creation of asset-based incomes for the people into national policy making agenda.

An effective and healthy capital market benefits resource allocation and wealth redistribution; on the other hand, a drooping and inactive market may jeopardize the stable growth of the larger macro-economy.

At present, the Chinese economy stands at a crucial crossroad; it is under inflationary pressure and faces the risk of a slowdown. The government must balance the pros and cons in curbing price surges while maintaining stable growth for the economy.

For the sake of the economy, the government should have clear objectives and realistic policies. The capital market is not just a mere barometer of the economy, its ineffectiveness would cause  a capital bottleneck for Chinese enterprises already squeezed by tighter credit controls, and capital mismatching could too accelerate economic imbalances.

Consequently, a drastic drop in asset-based incomes could hurt consumer spending. In turn, once this base of the economy has deteriorated, the sustainability of a prospering capital market would be called into question. Under such circumstances, how could the government turn a blind eye?

In evaluating market performance in recent months, market players and observers have overly exaggerated both the positive and negative sides of the market. When the stock market was bullish, there were over-estimations of hopeful signals in the Chinese economy; when the market started to dip, a chorus of pessimism amplified the risks of economic downturn. These exaggerated evaluations have contributed to uncertainties in market expectations.

Against such a backdrop, the government has acted in a responsible manner by stabilizing market expectations through a stamp tax cut and new trading rules on formerly non-tradable stocks*.

If the government has intervened based on the above consideration, the latest measure is not about rescuing the market but simply out of the interests of the market. While thinking of ways to deflect short term crisis, the government should also have more foresights in treating the root of the problems, such as loosening administrative intervention, adhering to the market principle of open, fair and just, and allowing market mechanisms to fully perform their roles.

Only in these ways can the Chinese stock market end calls for market-rescue measures and move foreword in its bidding farewell to a "policy-driven market". 

*Note: The ruling announced on April 20 by the China Securities Regulatory Commission [CSRC press release] targeted shares of listed companies with a "lock-up" period that were nearing the end of their terms and becoming tradable. To prevent massive inflow of these "freed-up" shares that could potentially distort prices, the commission ordered investors to go through "block trading" conducted after normal trading hours and thus ensuring that it would not impact the main indices.