China's Next Aim: Healthy Market
    After several attempts, China's authorities apparently have succeeded in taking some froth out of the country's red-hot stock market. But regulators still have their work cut out for them in building the market into a stable element of the country's economy.
    After a bull run that saw the Shanghai Composite Index quadruple in less than two years, Chinese stocks where throws into a sharp decline last week when the government tripled the stamp duty on share trades, just weeks after the central bank announced a fresh series of tightening measures.
    With the market showing signs of settling down in the past two sessions -- the Shanghai index rose 0.2% yesterday and 2.6% Tuesday after falling 8.3% Monday -- analysts say Chinese authorities may be ready to switch their focus from constraining the market to supporting its health.
    "In view of the sharp decline in the last few days, we would not be surprised if the government started to change its tone, perhaps emphasizing the importance of stock-market development to the national economy," Credit Suisse said in a note, adding it expects the government to move more slowly in introducing further monetary tightening measures.
    Stability in the stock markets has been one of Beijing's goals since May 2005, when it initiated a reform of shareholdings in listed companies to make stocks held by state entities freely tradable.
    It was that reform that sparked the market's winning streak, which stirred recent worries about a bubble bursting and wiping out the life's savings of small investors who bet heavily on shares.
    Markets were relatively calm yesterday, following several volatile sessions punctuated with speculation about what Beijing might do next.
    People's Bank of China Vice Governor Wu Xiaoling said the government wants to develop a healthy stock market.
    "China's macroeconomic controls are aimed at promoting the healthy, stable development of the stock market," she said yesterday on the sidelines of a private-equity forum in Tianjin.
    In a speech at the same forum, Ms. Wu urged foreign private-equity firms to set up yuan-denominated funds, a step that would lead to companies with private-equity investment listing on China's exchanges.
    A change in the government's focus would be based on the assumption that the market really has calmed down, and the jitters that gripped trading for much of the past week have made way for a fundamental shift toward more sanguine share trading.
    Any effort by Beijing to demonstrate it has no interest in allowing the market to tank could backfire if retail in investors pile back in, safe in the knowledge the government won't burst the bubble.
    After the stamp duty was raised and fears mounted that the correction could turn into a rout, the government has been at pains to moderate investor sentiment.
    China's three major state-run securities newspapers mounted a joint effort Monday to reassure investors, saying in front-page editorials the rise in stamp duty on stock trades is good for the market's long-term development. The same day, Beijing approved a number of fund-management companies to launch new equities funds in a bid to shore up investor confidence and stabilize the stock market.
    In a note Tuesday, Citigroup said that if the market resumes its climb, the government still has a number of market-specific measures available as options. Citigroup said likely actions could include launching index futures -- a move that is expected and will give Chinese investors a chance to make money from falling prices for the first time, although no timetable has been set. Other actions, Citigroup says, could include a ban on day trading or speeding up the reduction of state ownership in shares.
    If the market stabilizes, such steps may not be necessary.
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