China's Shanghai index surges 9.3%

SHANGHAI, China (AP) -- China's most-watched stock index surged 9.3% Thursday - its biggest percentage gain ever - after the government cut a tax on stock transactions in an effort to boost slumping markets.

The rebound came as many global markets are recovering modestly from turmoil linked to the U.S. credit crisis and slower global growth.

The benchmark Shanghai Composite Index surged as much as 9.6% in early trading, then fell back some before closing up 304.69 points at 3,583.02. The Shenzhen Composite Index of China's smaller bourse shot up 8.7%.

The jump came after the government announced late Wednesday that it was cutting a stamp tax on share transactions to 0.1% from 0.3%. That reversed a tax increase imposed May 30, when regulators were trying to cool surging stock prices.

The communist Beijing government keeps its markets isolated from global money flows and most shares are off-limits to foreign buyers. But investors are watching them closely for signs of a possible recovery, and markets abroad often react to swings in Chinese prices.

The latest tax measure took effect Thursday.

Chinese stock prices have fallen sharply since October, ending a boom that began in mid-2006. The main index has dropped by nearly half, hitting levels last seen in March 2007. As of Thursday's close it was still down 31% for the year.

"In recent weeks, expectations have been mounting on the government to take decisive steps to prop up the domestic markets," Jing Ulrich, chairwoman of China equities for JPMorgan Chase & Co., said in a report to clients.

"The lowering of stamp duty ... is among the most aggressive steps the government could have taken to improve sentiment," Ulrich wrote.

China's economy has grown by more than 10% annually for five straight years and the first-quarter expansion was 10.6% over the same period of 2007.

In China's state-dominated economy, stock prices are especially sensitive to policy changes. Analysts warned that short-term measures like the stamp tax cut will have only a transient effect, and that longer-term worries over interest rates and other economic policies are bound to limit the market's recovery.

"Considering the need for further development of Chinese capital market, the government needs to do more to ensure stable growth of the broader economy," said Wei Daoke, analyst at Shenyin & Wanguo Securities in Shanghai.

Alarmed by an 11 percent slide in the Shanghai index last week, the market regulator announced new restrictions late Sunday on sales of large blocks of shares newly freed from lockup periods.

That move, showcased in front-page headlines of state newspapers, was aimed at reassuring investors who worry that the market will be diluted when $430 billion in previously nontraded shares become available for trading this year.

But it seemed to do little to spur buying.

On Tuesday, for the first time in more than a year, the Shanghai benchmark dropped below 3,000 briefly before rebounding later in the day. Rumors that another market-boosting measure was in the works helped push the index up 4.2% on Wednesday.

The stamp tax reduction seemed to have done the trick, for now.

The Shanghai index was helped Thursday by a 9.9% advance in PetroChina's stock, to 18.15 yuan. Its shares account for about one-fifth of the benchmark's total value.

Among other big gainers, Aluminum Corp. of China was up 10% at 22.57 yuan, Industrial and Commercial Bank of China gained 7.9% to 6.81 yuan and Baoshan Iron & Steel Co. rose 10% to 12.06 yuan.

At least 550 companies' shares hit the 10% daily upside limit, according to figures compiled by market monitor Wind Consulting Co.