Capital reserves drop as stocks tank

By Wang Yanlin  |   2008-7-3  |     ONLINE EDITION

THE capital reserves in China's A-share market shrank by more than 16 billion yuan (US$2.35 billion) in June as stocks plunged and tax revenue dropped, said a report by Shenyin Wanguo Securities Co today.

Capital reserves decreased to 1.75 trillion yuan by the end of June, 16 billion yuan less than a month earlier. Money flew out because people invested less in the A-share market after its value dropped nearly 50 percent from its record high set in October, and 10 billion yuan in tax revenue was lost after regulators reduced the stamp duty in April.

With the decrease of transactions in a bearish market, the commissions collected from the deal also dropped 43 percent in June from a month ago.

The report said the flight of capital was not related to new share supplies as few new offerings hit the market last month.

The benchmark Shanghai Composite Index plunged from 3,459.04 on June 2 to 2,736.10 on June 30, a loss of nearly 21 percent in the month.

Facing the sharp slump, many investors have become reluctant to place more money into the stock market. People's desire to buy stocks or mutual funds has declined three consecutive months to 16.8 percent in June, the same level of 2006, when the market just recovered from a sluggish 2005.

The report estimated market capital would tighten as expectations of an interest rate hike may keep anxious investors on the sideline.

Earlier this week, the central bank's governor Zhou Xiaochuan said he could not rule out raising interest rates to stem inflation.

But the report said the pressure may ease in the fourth quarter when China's economy shows a clear pattern. The economy has fluctuated more than normal this year due to harsh winter snowstorms and the May 12 earthquake in Sichuan Province.