Last updated: June 6, 2007 9:22 am

China stocks continue rise on reassurance

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Chinese stocks rose moderately on Wednesday, as calm returned to the market following reassuring comments from the central bank and a major institutional investor.

The benchmark Shanghai Composite Index closed up 0.24 per cent to 3,776.3, extending Tuesday’s 2.6 per cent gain.

The Shenzhen Composite Index, which tracks the smaller of China’s two stock exchanges, was 1.9 per cent higher at 1086.22.

Wu Xiaoling, a deputy governor of the People’s Bank of China, on Wednesday urged investors to keep faith in the long-term prospect of the market. She said recent volatility in share prices would not damage the world’s fourth-largest economy as long as the market did not turn ”unhealthy”.

Gao Xiqing, vice chairman of China’s National Social Security Fund, one of the country’s biggest institutional investors, was quoted by Reuters news agency as saying he was “positive” about the long-term outlook of the market.

The market’s recovery, which followed one of its sharpest falls in a decade, will bring some comfort to the government, which has been striving to prevent a share price bubble without prompting a broader market collapse.

“The government basically achieved its target of cooling off the speculative bubble,” said Isaac Meng, a BNP Paribas analyst. “It plunged more than they expected – but this is a wild market.”

The sell-off was started last Wednesday when the government trebled the tax on share trading in a bid to damp rampant retail speculation that had seen share prices increase fourfold in two years.

A 7 per cent drop that day and a further 8 per cent fall on Monday indicated how difficult it is for the authorities to induce the sort of gradual sell-off they would like to see.

On Tuesday the stocks rebounded from a plunge of more than 7 per cent in early trading to close 2.6 per cent higher on a volatile day dominated by rumours of new government policies and official interventions in the market.

Unconfirmed rumours included that the authorities would abolish sales tax on purchases of shares, leaving it in place only for sell orders, and that the government would publicly rule out a capital gains tax on stock trading.

Rumours also swirled that public funds had been injected into the market and that the regulator had put pressure on fund managers to buy shares, although several fund managers denied this.

There were also indications that institutional investors began buying stocks on Tuesday afternoon on the grounds that the sell-off had been overdone.

“It is still a policy-driven market, so at some point in time the government might be perceived to be trying to bring it down, while at others it will be thought that they are trying to support it,” said Steven Sun, an HSBC analyst in Hong Kong.

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