Shanghai Index Rebounds Amid Volatile Session

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
June 5, 2007 5:23 a.m.

SHANGHAI, China -- Chinese stocks rebounded in volatile trading Tuesday following their sharpest one-day drop in three months as strong buying by institutions offset selling by retail investors. Japan and Hong Kong also ended higher.

The benchmark Shanghai Composite Index gained 2.6% to 3767.10 after a roller-coaster session that saw the index plunge as much as 7.2% earlier in the day. It fell 8.3% on Monday -- the benchmark's sharpest decline since an 8.8% drop Feb. 27 triggered a global market selloff. The Shenzhen Composite Index for China's smaller second market rose 2.5% to 1066.05.

Chinese investors had dumped shares Friday and Monday in reaction to a government decision last week to triple a tax on stock trades, viewing the move as a signal regulators are determined to cool frenzied trading that had lifted stock prices nearly 60% since the start of the year, following a 130% surge in 2006.

By Tuesday's close, the benchmark Shanghai index was 13% below its record high of 4334.92, hit May 29. But it was still up 40% for the year so far.

China's stock markets are largely closed to foreign investors. Analysts attributed the selloff Monday to panic-selling by individual retail investors. The stock market boom has prompted millions of first-time investors to jump into the market, tapping savings and retirement accounts and mortgaging homes to buy stocks. Authorities are worried that the new money is fueling a bubble in prices.

Shifting to damage control, on Tuesday state-run newspapers carried prominent articles announcing the approval of four new investment funds. Financial newspapers sought to reassure investors, asserting that the tax increase on stock trades would help the markets by encouraging longer-term investments in better stocks.

Economists say the recent fall in Chinese prices should have only a modest impact on the overall economy because China's growth is driven by exports, not the financial markets, and families have still much more money in savings than in shares.

Elsewhere in Asia, Japanese stocks rose for a fourth straight session, led by technology and pharmaceutical shares. Investors were heartened by modest gains on Wall Street overnight and shrugged off volatility in Chinese shares. The Nikkei 225 index added 80.39 points, or 0.45%, to finish at 18053.81 points, the highest close since Feb. 27. The index now has gained 2.65% the past four trading sessions.

Motomi Hiratsuka, head of global portfolio marketing and trading at BNP Paribas in Tokyo, said the Chinese stock market's recent drop was unlikely to impact the Tokyo stock market in near term. "China's recent drop is rather healthy for its market, considering that Beijing announced stamp tax hikes just last week," he said. "Investors are warned what the government will be up for if shares start soaring again."

In Tuesday's session, gainers included Tokyo Electron, which climbed 1.37%, Fanuc, which added 1.82% and Daichi Sankyo, which rose 1.81%.

Other markets in the region also advanced. Hong Kong's Hang Seng Index rose 0.54% to finish at 20842.15. The Korea Composite Stock Price Index, or Kospi, ended up 4.60 points, or 0.3%, at 1742.19 and the Weighted Price Index of the Taiwan Stock Exchange rose 9.2 points, or 0.1%, to close at 8303.99, the highest since July 19, 2000.

In currencies, the dollar was trading at ¥122.84, up from ¥121.82 late Monday in New York.