China stocks tumble amid fears

Chinese stocks fell more than four percent on Thursday as fears about the cancellation of tax on interest on bank deposits continue to plague the market. The benchmark Shanghai Composite Index dropped 4.03 percent to close at 3,914.20 points after moving between 3,912.81 and 4,113.28. The plunge was attributed to several unfavorable factors.

China's top legislature started to debate a proposal on giving the State Council, or the cabinet, the power to reduce or cancel the interest tax. If the proposal is passed and a tax reduction or abolition follows, bank savings will become more attractive. That will help ease a diversion of deposits to the equity market, which has been widely believed as a major factor driving up the high-flying stock prices.

Another proposal under discussion by lawmakers is also affecting the market. The Ministry of Finance has suggested issuing up to 1.55 trillion yuan of special bonds fund purchases of foreign reserves for the yet-to-be-established State Investment Company.

The votings for both proposals will be on this on Friday.

Analysts expect the giant offer of bonds to affect the supply of funds in the country's equity market which is thought to be mainly driven by an over supply of money.
Adding to investors' jitters, assistant central bank governor Yi Gang said Wednesday his agency is determined to make use of a range of monetary policy tools to curb inflation, including interest rates hikes.

However, any monetary tightening is unlikely to target the stock market directly, he noted.
"We are paying keen attention to asset prices, but they are not the decisive factor when determining macroeconomic control measures. We are mainly concerned with inflation, which in China mainly means the consumer price index," Yi told the reporters.

(source: chinadaily.com.cn)