Tax cut propels China stocks to biggest gain since late 2001

The overnight announcement of a cut in share trading taxes drove Chinese stocks 9.29 percent higher in soaring turnover on Thursday, with the key Shanghai Composite Index up 304 points to 3,583.03, the largest gain since Oct. 23, 2001, when daily limits were introduced.

The policy change, which slashed the stamp tax from 0.3 percent to 0.1 percent effective immediately, was announced two days after the benchmark index had fallen to half its peak of October 2007.

The Shenzhen Component Index jumped 9.59 percent to 12,914.76 points.

Combined turnover hit 263 billion yuan (37.57 billion U.S. dollars), twice that of Wednesday. In Shanghai, volume was 191.7 billion yuan, the most since the beginning of this year.

Turnover on the two bourses swiftly reached some 123.48 billion yuan in the first hour of trading on Thursday, a record high.

Only two stocks fell, and more than 1,000 rose by the 10-percent daily limit.

The long-awaited tax cut is a clear signal of the government's determination to bolster the fragile market, said Wang Junqing, analyst with Guosen Securities. Market sentiment was likely to recover with lower transaction costs, he said.

The tax cut was the most aggressive move thus far of several measures. On April 20, regulators announced curbs on the sale of non-tradable shares that come out of lock-up periods.

The move will address concerns over a flood of shares coming into the secondary market, which could "put constant pressure on stock prices and distort the price formation mechanism," the China Securities Regulatory Commission said.

The tax cut, while welcome, won't eliminate the market's problems. The prolonged downtrend would not be completely reversed unless inflationary pressures eased and housing prices stabilized, Wang said,

Inflation soared to 11-year high of 8.7 percent in February after the worst snow storms in half a century.

More than half of the 20 largest-capitalized shares rose by the daily limit of 10 percent on Thursday, including Sinopec, the country's biggest refiner; China Life, the biggest life insurer, and steel maker Baosteel.

Brokerage shares led the gains, with investors expecting that these firms would benefit from an overall market rebound. Citic Securities, the biggest brokerage, soared 10 percent to 32.13 yuan.