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FINANCIAL SYSTEM IN CRISIS

China tries to halt stock skid

Beijing scraps tax on share purchases and plans to buy stakes in three largest banks.

September 19, 2008|Don Lee | Times Staff Writer

SHANGHAI — With the Shanghai composite index down almost 70% since last October and no end in sight, China's government said Thursday that it would scrap a stock-buying tax and plow money into the nation's three largest banks in an effort to halt the decline.

Chinese authorities also said they would encourage state-owned companies to make stock purchases.

The steps are intended to boost investor confidence and prop up a stock market that has fallen sharply in the last year, with further declines after the bankruptcy filing of Lehman Bros. Holdings Inc. and the rushed sale of Merrill Lynch & Co. to Bank of America.

The actions clearly helped, along with a strong Wall Street rebound from U.S. plans to rescue banks. The Shanghai index shot up 9.3% by midmorning Friday.

Beijing's actions reflect the increased urgency felt by many governments as markets and banks have been roiled by the problems coursing through the U.S. financial system.

In Russia, the main stock exchanges remained mostly closed Thursday, a day after regulators suspended trading amid a drop in share prices.

Russian officials, meanwhile, pledged billions of dollars more to buck up the ailing stock market and banking sector.

An array of individual interventions by nations, along with a coordinated move by central banks to pour money into financial systems, has helped lift sentiments.

U.S. stocks rebounded sharply Thursday, which could give a boost to other markets.

The 70% drop in the Shanghai composite since October is the steepest loss among major economies.

Chinese shares were grossly overvalued, and the nation's stock market has also suffered because large volumes of non-tradable shares are held by state-owned entities.

Periodically blocks of such shares have been let into the market, diluting stock prices.

Thursday's action by Beijing should help counter such concerns, analysts said, as it calls for state-owned entities to buy back shares of listed subsidiaries.

"We view this as a significant development given that the overhang of non-tradable shares has been a major factor behind negative sentiment," said Jing Ulrich, chairwoman of China equities at JPMorgan Securities in Hong Kong.

Beijing also scrapped a part of the stock transaction tax.

Starting today, investors will no longer face a 0.1% fee every time they buy shares, although they will still have to pay that tax when they sell stocks.

Additionally, an arm of China's sovereign wealth fund, China Investment Corp., plans to buy stakes in the nation's three biggest banks to fortify their share prices, the official New China News Agency said. The report didn't specify how much China Investment would invest.

Ulrich said she expected Beijing to take more steps to support the stock market. The announcement Thursday "signals the government's more proactive approach toward restoring market sentiment," she said.

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don.lee@latimes.com

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