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Chinese stock market slump sends shockwaves to global markets
(Xinhua)
Updated: 2007-03-01 13:35

Canada's stock market in Toronto declined 364 points, a largest slump in three years, with materials, financial and energy shares bearing the brunt.

While China's economy has climbed to be the fourth largest in the world, becoming the biggest copper importer and the second biggest oil consumer, the Toronto stock market, with its many mining and oil companies, experienced a growth of 9.6 percent over the past few years.

Tuesday's shock waves also extended to European markets, which are also highly responsive to North American bourses. Britain's FTSE 100 was down 2.28 percent, Germany's DAX index was down 2.44 percent, and France's CAC-40 was down 2.87 percent.

According to some industry observers, the loss of approximately 800 billion yuan (US$102 billion) in market capitalization on the two Chinese mainland bourses, was due largely to profit-taking by heavyweight mutual funds. Others believed the panic was caused by rumors that capital gains tax would be increased by the central government, a rumor that the Ministry of Finance and the State Administration of Taxation both denied on Wednesday.

At the end of last year, the taxation administration began to stipulate that individuals with an annual income of more than 120,000 yuan declared their income, including earnings on the capital market. The move was seen as a prelude to the capital gains tax.

But sources with the taxation administration said this was an misunderstanding. They told Xinhua that no tax would be levied on capital gains at the present time.

Since 1994, China has exempted retail investors in equities from individual income tax on capital gains.

Some market analysts also said that a latest rise in the central bank's deposit reserve ratio was another factor behind Tuesday's share panic. In the latest hike, the central bank required commercial banks to set aside 10 percent of their deposits starting from February 25, up from 9.5 percent.

Analysts believe excess liquidity, supported by an increasing money supply from the central bank and capital flow from residential savings accounts to domestic capital markets, will continue to maintain the value of equities after the major correction.

On Wednesday, Chinese shares staged a strong rally, bouncing back from the heaviest losses in ten years..

The benchmark Shanghai Composite Index surged 109 points, or 3.94 percent, to close at 2,881.07 points.

The Shenzhen Component Index jumped 248 points, or 3.19 percent, to end at 8,039.70 points. Turnover on the two bourses totaled 136.08 billion yuan.


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