China cuts stock trading tax, highlights refinancing concerns

Stamp duty is halved from 0.1 percent to 0.05 percent. The margin ratio is lowered to 80 percent. IPOs will slow. Refinancing will be scrutinized. Major shareholders will not be able to pump and dump.

Photo by Kuang Da

Photo by Kuang Da

By CHEN Jing


China has cut the stamp duty on securities trading by half to 0.05 percent to support its sagging stock market. The Shanghai Composite Index rose by 1.13 percent on Monday and 1.2 percent on Tuesday. The index rallied in July but has fallen by over 6 percent in August.

This most recent cut in stamp duty was in April 2008, from 0.3 percent to 0.1 percent. At that time, the tax still applied to both buying and selling of shares. Then in September 2008, the tax on buyers was canceled. The stock market rallied by more than 9 percent each time.

Analysts believe the tax cut will encourage trading and boost the market. Before the weekend announcement, stamp duty accounted for about 60 percent of all transaction costs.

A few brokerage companies said they will lower commissions starting Monday. 

Separately, the minimum margin ratio for margin trading will be lowered from 100 percent to 80 percent, effective from market closing on September 8. Regulators hope this will invigorate trading while still keeping risk at a reasonable level. Stock brokers can require their own ratios based on clients’ credit records.

The government announced other market-stabilizing measures on Sunday. China Securities Regulatory Commission (CSRC) will slow the pace of IPOs to restore “a dynamic balance between capital raising and investing.”

It will also put more restrictions on refinancing by listed companies.

All refinancing deals must be approved by regulators, who will check when the company last raised money, and whether the money was invested in said purposes and generated expected returns. If a company has been losing money, or is trading below its IPO price or asset value, or has a track record of raising money simply for speculative purposes, its refinancing will likely not be approved. These restrictions do not apply to real estate developers.

Major shareholders will not be able to sell their shares through the stock market if their company is now trading at below-IPO price or asset value, or if its total cash dividend in the past three years is less than 30 percent of its profits in the same period.