Chinese stocks ended three straight days of losses with a sharp rise on Friday after the government stepped in to revive the market, cutting the trading tax and promising share buybacks.
A woman reads information on a electronic screen at a brokerage house in Shanghai September 19, 2008.
The benchmark Shanghai Composite Index jumped 9.46 percent to close at 2,075.09 points, recovering the steep losses in the previous three sessions due to the shockwaves of the US financial woes.
All the yuan-denominated A-shares rose to their daily limit of 10, or 5 percent. The 5-percent limit applies to shares of special treatment companies, which saw negative profits in the previous two years.
The rally came after the Ministry of Finance announced overnight that the stamp tax on stock purchases will be scrapped from Friday. Investors interpreted the move as a signal that the government will not let the market fall further.
The State-owned investment agency Central Huijin provided another boost. As the majority shareholder of three major banks, the Industrial and Commercial Bank of China, Bank of China and China Construction Bank, Huijin said it would buy shares of the three lenders in the secondary market.
The aim is to "guarantee the government's controlling stake" and "boost their [the three banks'] stock prices", it said in a statement.
At the news, all financial shares jumped 10 percent, the maximum allowed by the exchanges, propelling a broad rally in other shares.
Banking shares alone account for more than 25 percent of the Shanghai Composite Index. Therefore, their performances can partly determine whether the rebound is short-lived or sustained.
On top of the Huijin pledge, the State-owned Assets Supervision and Administration Commission voiced its support for major State-owned firms to buy back their shares.
An overnight surge on Wall Street also helped the Chinese market sentiment. The Dow Jones Industrial Average leapt 410 points on Thursday to 11,019, powered by reports of a US government and Congress plan to soak up bad debts from troubled banks.
Shrugging off the on-going scandals involving dairy producers, Beijing Sanyuan Food Co. surged its daily limit, as none of its products were found to contain melamine, a chemical that have led to the deaths of four babies across the country.
The long-awaited official rescue came after the Shanghai index lost 70 percent in less than one year, with valuations nearing record low levels. Experts have called on the government to intervene to boost investor confidence.
At the start of the week, the central bank cut lending rates and reduced the amount of cash small banks must set aside as reserves in a sharp reversal in the country's monetary policy.
The tight monetary policy put in place at the end of last year to fend off inflation was partly blamed for the stock woes.
However, the energizing impact of loosening credit was overwhelmed by fears over the spillover effect from financial turmoil in the US, in which Lehman Brothers filed for bankruptcy protection and Merrill Lynch found help in the arms of Bank of America.
Investors doubt whether Friday's rally can sustain, as earlier government measures to revive the market have failed. The stamp tax was cut to 0.1 percent from 0.3 percent in April and restrictions were imposed on the sale of previously un-tradable shares, but only to see the stocks continue to slide after knee-jerk rebounds.
"Whether the rally can continue depends largely on investors' confidence," said Wang Dong, vice finance professor with the Guanghua School of Management at Peking University.
He was confident about the long-term performance of China's equity market, thanks to the steady development of the country's economy.
"China's overall economy fares relatively well, " he said. "Small and medium enterprises can get through the current difficulties and growth will pick up again."
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