Chinese Stock Exchanges Drop Sharply

Trading Tax Cools Markets, Which Analysts Have Said Are Due for a Downturn

China's stock exchanges fell sharply yesterday in the second day of a long-awaited correction in the country's overheated markets, but traders outside China largely shrugged off the downturn.

The Shanghai composite index was down 8.3 percent, after falling 2.7 percent on Friday on news that the Chinese government was raising taxes on stock-market trading. Chinese authorities said the taxes were an effort to cool a market that has been rising at an excessive clip.

A similarly sharp decline in February, during which the Shanghai Stock Exchange fell 9.9 percent, caused a brief global sell-off. This time, most other markets in Asia were up. U.S. indices traded down slightly early yesterday but later rose to eke out gains.

In China, shares of two of the country's largest banks -- Industrial and Commercial Bank and Bank of China -- fell, helping push the broad index down. Shares of telecommunications giant China Unicom also fell.

Investment experts have been warning of trouble for most of this year, noting that even though the stock markets are worth more than four times what they were in June 2005, many listed companies still have trouble with corruption and openness.

Late last month, former U.S. Federal Reserve chairman Alan Greenspan said the Chinese stock markets were due for a "dramatic contraction" and that the pace of gains was "unsustainable." Even earlier, in January, Cheng Siwei, the National People's Congress vice chairman, warned, "A bubble is forming. Seventy percent of mainland listed companies do not reach international standards."

Yi Xianrong, a researcher at the Institute of Finance and Banking at the Chinese Academy of Social Sciences, a government-affiliated think tank, said in an interview that many indicators point to a precarious situation: Stocks change hands rapidly (they are usually held for less than 8 days) and prices of shares are far out of line with company earnings. "This all means the bubble is very serious now," Yi said.

Much of the trading in China yesterday was in shares denominated in dollars and controlled mostly by foreign institutional investors. "This means they think the Chinese stock market is a big risk now," Yi said.