The Excessively High Stock Trading Stamp Duty Must Now Be Adjusted

Author: [Site Administrator]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-11-24 17:48:28
Column: Expert Perspectives

The recent news that future large mainland stock IPOs should use A-shares as the primary listing venue carries great significance. It simultaneously addresses two issues this column has repeatedly emphasized: first, the excessively low proportion of blue-chip A-share listings; second, the protection and rational utilization of quality listed company resources.

Once this new policy is implemented, under the Securities Law, the quasi-illegal blue-chip stocks with ultra-low float ratios currently in the A-share market will no longer increase. Had this policy been implemented earlier, PetroChina's A-share float would not be the current 4 billion shares but should be at least no fewer than 18 billion shares. Imagine: if the stock's A-share float were 18 billion shares, would the farce of a 48-yuan opening price have been possible?

It can be said that once the issue of excessively low blue-chip float ratios is resolved, the market's operating structure will have a rational foundation. If the most important A-shares lack a rational operating structure, then building a rational foundation for a multi-tiered capital market is even less feasible. In a sense, solving this problem is a deepening of the share-structure reform — extremely important. However, a new legacy issue arises: how to ensure these already-listed quasi-illegal blue-chips with insufficient float ratios reach compliance within a deadline. Otherwise, these stocks will become scarce resources that, after index futures launch, create serious speculative hazards.

But the resolution of this operating structure foundation is only one level of the problem. The market is not composed solely of tradable stocks — an equally important issue is whether transaction costs fall within a reasonable range. No matter how good the market system and structural design, if an artificially super-high transaction cost is imposed, the operation of that system and structure will ultimately face crisis. World capital market history demonstrates that reducing stock trading stamp duty is a general trend. The very purpose of market design is to facilitate transactions and lower costs — otherwise, there is no reason for the market to exist.

A serious misconception currently exists: that there is rampant liquidity, too much money, and therefore excessive speculation. This column has already refuted this fallacy in previous articles. A conclusive point can be restated: given the massive quantity of listable resources, there is no liquidity glut. In the long run, we actually face the enormous challenge of insufficient liquidity. Consider: currently there are fewer than 2,000 A-share listed companies, while India has over three times that number. For A-shares to merely reach India's scale, at least 4,000 more companies would need to be listed in the short to medium term. Can our supposedly surplus liquidity immediately absorb 4,000 companies?

Transaction cost design is one of the most fundamental issues in market construction. An excessively high stamp duty is harmful to the market in every way and beneficial in none. As for its supposed regulatory function, facts have proven it a complete failure. After the stamp duty hike in May, the market actually rose from 3400 to 6100 in less than five months, creating an even more dangerous blue-chip bubble. The effectiveness of such regulation — facts have already provided the answer.

Once the blue-chip float ratio problem is resolved, returning stock trading stamp duty to its pre-May level should be placed on the agenda. Only with reasonable transaction costs can there be a reasonable market environment, making it possible for an even larger pool of listable resources to be developed more smoothly.

Some may worry that lowering stamp duty now would trigger a new round of speculation. This thinking is just as absurd as believing the May stamp duty hike could suppress market speculation. The market is more fundamentally about supply and demand — the most effective method for curbing speculation has always been increasing supply. May I ask: the current stamp duty level far exceeds international levels and is absolutely unsustainable in a globalized context. It must inevitably be changed. If we don't change it during a correction, we're missing a chance to correct the error. Does anyone want to add fuel to the fire during the next rally instead?

An even more erroneous idea is to stockpile stamp duty reduction as a future market-rescue tool. If such thinking persists, it means the regulatory mindset is still trapped in the old circle. In fact, A-share history shows that policy tops and policy bottoms have never been the true tops and bottoms. All true tops and bottoms have never been caused by any single policy. Policy is just one component force, not the resultant itself. This must be clearly understood.

Managing the market requires grand vision and broad perspective. The most important thing for the market right now is to perfect a multi-tiered, efficient capital market, and then enable more companies to grow through the capital market, becoming new sources of creativity and driving force for China's economy.

An efficient capital market obviously cannot be one whose transaction costs are several times higher than the world average. A market that uses stamp duty increases to regulate speculation obviously cannot be a mature market. The excessively high stock trading stamp duty has reached the point where it must be adjusted — this deserves sufficient thought and attention.