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China's jittery stock market tumbled on Friday in response to rumours that the government planned to impose a stock capital gains tax or take other strong measures to cool the market. Most analysts and fund managers believed the rumours were false, especially since the market had already been showing signs of cooling after a hike in the stock trading tax this week.
But nervous individual investors dumped stocks in the final 45 minutes of trade and the Shanghai Composite Index ended down 2.65 percent at 4,000.742 points, its lowest finish since May 16. At one stage, it sank as much as 3.5 percent.
Falling stocks overwhelmed gainers by 754 to 108 while turnover in Shanghai A shares was very heavy at 224.7 billion yuan ($29.4 billion), against Thursday's 234.8 billion.
The market has been swinging wildly since Wednesday, when it plunged 6.5 percent after the stock trading tax was raised to cool a bull run that had boosted the index 62 percent this year. Three officials from the finance ministry and tax administration dismissed the capital gains tax rumour on Friday as mere speculation. But that was unlikely to reassure investors much - on May 22, officials denied rumours of an increase in the trading tax, which was announced a week later.
Another widespread rumour on Friday suggested the government would abolish the tax on interest in bank deposits, in a move to pull money out of stocks and back into banks. Many analysts said that with a strong stock market now key to China's economic reforms, and with a Communist Party congress to be held in the second half of this year, authorities would not take any action that might reverse stocks' longer-term uptrend.

Copyright Reuters, 2007

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