China Taxes To Slow Equity Market
A: Chinese government makes a move to stop the rapidly overheating stock market by raising the tax on shares traded from 0.1% to 0.3%. According to CNN Money article, "...In the 16-year history of the modern Chinese stock market, an increase in stamp duty has always caused a market slump over the following few weeks or ended a bull run.". Hmmm...Just thinking out loud. Market corrects, dragging down US equities with it, bringing down wealth effect, sparking a re-adjustment in hedge fund holdings, things get real rocky, traders get conservative, wall street ends 4 year bull run? If stocks fall and wealth is lost in paper profits, how will that affect future Manhattan real estate investments and affordability? Now you know why I talked about China here over the past few weeks!
China shares PLUNGE 6.5% (don't say Jeff & I didnt discuss this weeks ago and it's ultimate effect on US equities) on news that the government raises the tax on shares traded to slow the market's unsustainable growth.
According to Yahoo Finance:
Chinese stocks plunged Wednesday after the government raised a tax on share trades, trying to cool a market boom amid growing concerns about a possible bubble.Let's see if it hits home here in the US, via a bad stock market day. I say YES and expect US equities to get a big headache from this. Here are Jeff & my previous posts on this topic raising the warning flag:"This policy change reveals the government's concern about a possible stock market bubble," said Citigroup economist Minggao Shen, describing the tax hike as Beijing's first formal move to cool the boom. "The market didn't know what the government was thinking until now."
Greenspan & Asia: Too Close To Home -
CHINA EQUITY MARKETS COLLAPSE --> JITTERS HIT US EQUITY MARKETS --> RECENT WEALTH EFFECT REVERSES AS WEALTH CREATION IS NOW LOST --> INCREASES CHANCE OF US RECESSION --> COMPANIES ADJUST / SCALE BACK INVESTMENTS DUE TO RISK / CUT COSTS --> JOB CUTS --> REAL ESTATE LOSES 2 KEY FUNDAMENTAL ELEMENTS (jobs & stock market wealth)Now this hasn't happened yet, but the warning signs are there. Most just choose to ignore them because they are too concerned with recent stock market strength here and nation wide housing woes (excluding Manhattan) that we are experiencing. Media stays away because they report on what already happened, not what might happen. But now that Greenspan speaks up, the media has a reason to write about it!
As boring as it may sound, these things SHOULD be on any investor's radar even if you only own US stocks and no real estate. US stocks will get pounded if China's equity market collapses! That's for sure. Question is, will you be on the lookout? I certainly hope so. While the effect on Manhattan real estate is more towards the end of the chain of events that would occur with a Asian equity collapse, if it does occur we will lose some fundamental umph that has helped our housing market buck the trend thus far.
While the economic juggernaut that is mainland China is not new news, recent efforts to slow the pace of growth in China has spurred new speculation about how and when this colossus of an investment trend will end and more importantly, will it end badly? The jury is out on these questions and I will argue that it may be out for some time to come. I'll also argue that it will end badly, no ifs ands or buts.Sometimes it ends up being something like this that ultimately ends a good run for one particular tradable market. Globalization has been the money making theme over the past few years, but I seriously worry about an Asian equity contraction and what effect that has on hedge funds, US equities, and paper profits. We are due for a correction, especially in the Asian markets, and I've been discussing this more and more recently because I think we are very close to one.
Today's news sparks a huge selloff and I certainly will be very interested to see how this plays out. I also worry about how hedge funds maneuvers might make any correction here or abroad even more dramatic. Time will tell. Should the market here get infected by what happens oversees, expect paper profits to fall, consumers to be less confident, and affordability for expensive housing to drop. The latter won't happen until the markets really fall here, and this hasn't happened yet. Again, forward thinking. That is what this site is all about!
Comments (1)
Great article. It will be interesting to see the longer term effects of this tax increase on China and the U.S.
Posted by havensofmanhattan | May 30, 2007 9:31 AM