Excessively High Stock Transaction Stamp Tax Must Now Be Adjusted

2007/11/22 21:30:42

This week's news that future large domestic stock IPOs should use A-shares as the primary listing venue is of great significance. It also responds to two issues this ID has repeatedly emphasized: first, the excessively low proportion of A-share blue chips listed; second, the protection and rational utilization of quality listed company resources.

Once this new policy is implemented, in accordance with the Securities Law, the kind of quasi-illegal blue chips currently on the A-share market with ultra-low tradable share ratios would no longer increase. Had this policy been implemented earlier, PetroChina's tradable A-shares would not be the current 4 billion shares, but at least no fewer than 18 billion. Just imagine: if the current tradable A-share count for that stock were 18 billion, could the farce of a 48-yuan opening price still have been staged?

It can be said that once the issue of excessively low tradable ratios for blue chips is resolved, the market's operational structure will have a rational foundation. If the most important A-shares don't even have a rational operational structure as their foundation, then a rational foundation for constructing a multi-tiered capital market is even more out of the question. In a certain sense, the resolution of this issue is a deepening of the share reform process — extremely important. However, a new legacy problem arises here: how these already-listed quasi-illegal blue chips with insufficient tradable ratios should meet compliance standards must be resolved within a time limit. Otherwise, these instruments will become scarce resources, embedding serious speculative landmines after the launch of index futures.

But resolving this operational structure foundation is only one dimension of the problem. The market's composition isn't solely about those tradable stocks — an equally important question is whether the costs of trading are within a reasonable range. No matter how good the market system and structural design are, if artificially exorbitant transaction costs are imposed, the operation of that market system and structural design will ultimately face crisis. The development history of global capital markets shows that a reduction in stock transaction stamp tax is the overall trend. The purpose of market design is fundamentally to facilitate trading and reduce costs — otherwise there would be no need for the market to exist.

A serious misconception currently exists: the belief that current liquidity overflow means too much money, hence excessive speculation. The refutation of this fallacy has been thoroughly addressed in this ID's previous articles. A conclusive viewpoint can be restated as follows: relative to the enormous quantity of resources eligible for listing, there is no liquidity overflow problem. From a long-term perspective, the concern should actually be about the enormous challenge of insufficient liquidity. Consider: currently, the number of A-share listed companies is fewer than 2,000, while India has more than three times that. So if A-shares were even just to reach India's scale, at least 4,000 additional companies would need to be listed in the short-to-medium term. I ask: can our supposedly excessive liquidity immediately absorb these 4,000 companies?

The design of transaction costs is one of the most fundamental issues in market construction. An excessively high stamp tax is harmful to the market in every way and beneficial in none. As for its supposed regulatory function, facts have proven it to be a complete failure. After the stamp tax increase in May, the market instead rose from 3,400 to 6,100 points in less than five months, creating a blue-chip bubble of even greater danger. The effectiveness of its regulatory impact — the facts have already provided the answer.

Once the issue of excessively low blue-chip tradable ratios is resolved, restoring the stock transaction stamp tax to its pre-May level should be placed on the agenda. Only with reasonable transaction costs can there be a reasonable market environment, which in turn enables the smoother development of an even greater volume of listing resources.

Some may worry that reducing the stamp tax now would trigger a new round of speculation. This thinking is equally absurd as the belief that the May stamp tax increase could suppress market speculation. The market is fundamentally about supply and demand. The most effective way to curb market speculation has always been to increase supply. The current stamp tax level far exceeds international levels — under a globalizing backdrop, this is absolutely unsustainable in the long run and will inevitably be changed. If the change isn't made during the adjustment period, a correction opportunity is missed. Does one really prefer to add fuel to the fire during a rally?

Furthermore, an even more erroneous idea is to store the stamp tax reduction as a future market rescue tool. If such thinking persists, it means the regulatory mindset is still circling within the old paradigm. In fact, A-share history demonstrates that policy-driven tops and bottoms have never been real tops and bottoms. The 1996 People's Daily editorial didn't create the final high point; nor did this year's May stamp tax. The so-called policy bottom of 777 points in 1994 ultimately broke down to 325 points. All genuine tops and bottoms have never been caused by any single policy. Policy is merely one component force — not the combined force itself. Clear-headed recognition of this is essential.

Market management must embrace big thinking and broad vision. The most important matter for the market right now is to perfect a multi-tiered, efficient capital market, then allow more enterprises to grow through the capital market and become new sources of creativity and driving force for the Chinese economy. Therefore, one must not let market fluctuations disrupt the thinking or narrow the vision. An efficient capital market obviously cannot be one whose transaction costs are several times higher than the world average; a market that uses stamp tax increases to regulate speculative behavior is obviously not a mature market. The time has come when excessively high stock transaction stamp tax must be adjusted — this point deserves sufficient thought and attention.