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BIZCHINA> News
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Stocks down another 1.71% pending voting results
By Li Zengxin (chinadaily.com.cn)
Updated: 2007-06-29 11:47 Chinese stocks kept plunging deep this morning in expectations of today's legislative approval on a series of measures that may result in capital diverting to other investment channels from the stock market.
The benchmark Shanghai Composite Index opened nearly 90 points lower from 3,824.29 and went through the morning session below yesterday's closing line. By the noon break, it finished at 3,847.37, down 66.83 points or 1.71 percent. The Shenzhen Component Index, tracking the smaller Shenzhen Stock Exchange, opened lower from 12,555.51 and closed at 12,552.52, 329.66 points or 2.56 percent lower than yesterday's closing. Of all the A shares listed on the two exchanges, only 149 went up this morning, while as many as 1,133 dropped and 171 finished unchanged. In the plunging wave, stocks in the mining, transportation and food sectors were more resistant to the depressing pressure. Largest traders in Shanghai, China Unicom and China Yangtzi Power were both slightly up, but could not help reversing the trend. The new share Shenzhen Topband Electronics rocketed 515 percent to 64.5 yuan on its first trading day. Henan Shuanghui Investment and Development, resuming trading today, saw the largest trading volume and transaction value at the Shenzhen bourse, and rose 129 percent to 58.9 yuan. Analysts said the latest series of government measures to curb stock market liquidity have taken effect. These measures include the doubling 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, analysts said. China's top legislature yesterday began discussing a draft bill that would suspend or cut the longstanding tax on interest earned on personal savings. If passed by the National People's Congress today as expected, it will bring adverse effects to the stock market, but analysts said 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. Higher interest rate will attract more deposits 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. (For more biz stories, please visit Industries)
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