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Stocks lusterless with lowest turnover in June
By Li Zengxin (chinadaily.com.cn)
Updated: 2007-06-29 15:50

Stocks in the mining, food and transportation industries were more resistant to the depressing pressure of a downward trend. Shanxi Xishan Coal and Electricity Power rose 3.07 percent to lead the surge of mining shares.

B shares finished mixed. Of the 109 listed B shares, 28 climbed up and 66 went down. Guangdong Provincial Expressway Development was up 6.66 percent as the largest gainer. Most closed-end mutual funds listed on the exchanges plunged today.

Analysts said the latest series of government measures to curb stock market liquidity have taken effect. These measures include the raising of the stock trading stamp duty, opening up of QDIIs, the quicker pace of red-chip's return to the mainland and the proposed issuance of special treasury bonds, which triggered the latest selling sprees.

The latest news said that the Standing Committee of the National People's Congress has passed a bill submitted by the State Council to authorize the Ministry of Finance to cut or suspend the tax on interest income from bank savings.

The Ministry of Finance may decide on whether to reduce the rate or abolish the tax completely. Analysts said it will bring adverse effects to the stock market, but the impacts would be rather limited.

The first influence is an income effect. Currently the one-year term deposit interest rate is set at 3.06 percent. With the current 20 percent tax on interest, the after-tax interest rate is 2.448 percent. If the tax is suspended, the after-tax rate will be 3.06 percent while if it is cut in half, the after-tax rate will be 2.754 percent. Higher interest rate will attract more deposits to savings accounts at banks.

The second influence is a substitution effect. In theory, the proper share price is the earnings per share divided by the interest rate. Currently, the reverse of the after-tax rate 1/2.448%, is approximately 41. It means a share price should equal 41 times of its earnings per share. In other words, the price to earnings ratio of the stock should not exceed 41. If the real share price is lower than this figure, buying stocks is more profitable than putting the money in the banks. Otherwise, bank deposits will generate more interest.

If the interest rate tax is suspended, the reverse of the after-tax rate is 1/3.06%, or 33; and if the interest rate tax is cut in half, the reverse of the after-tax rate is 1/2.754%, or 36. Both of the multipliers are smaller than 41, meaning less shares are worth of investing in because share prices higher than 33 times or 36 times are less profitable than depositing the same amount of money in banks.

But analysts believe the interest tax slash won't immediately change the money outflow, and in the meantime, if China's inflation keeps at 3 percent growth within this year, the role of the slash will be limited to stop capital inflowing to the stock market, according an analyst at Guotai Junan Securities.

"Chinese residents are able to bear risks and willing to invest money for higher returns, so the bull stock market is their first choice of course," said Huang Changzhong, a researcher with China Securities Research Co Ltd.

Analysts believe the major factor dragging the stocks down recently, was the prospect of issuance of a special treasury bond, rather than that of the interest tax slash. The bill to authorize the Ministry of Finance to sell 1.55 trillion yuan of special treasure bonds to fund the country's new State investment agency, was also passed in the afternoon today.


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