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HOW HAVE STAMP DUTY CHANGES AFFECTED THE MAINLAND CHINESE STOCK MARKETS?

Chinese policymakers perhaps view stamp duty increases on their share markets as a way of reducing short term speculation and resulting stock price volatility when they believe the market to be overheated; new research examines the implications of this and sees if this policy has been successful.
PhD candidate, UNSW, CMCRC ResearcherLynn Zhu is a PhD student with the Capital Markets Co- operative Research Centre. She is enrolled at the School of Banking and Finance at the University of NSW. Her research interests are mar- ket liquidity, insider trading and market manipulation.Keywords: Capital markets, regulation, market design
Transaction taxes such as stamp duty have been used by policymakers from various nations in the past to discourage short-term speculation activities on stock markets with mixed success. A study by CMCRC PhD student Ling Zhu and Professor Peter Swan examines stamp duty adjustments in Mainland China with cross-listed stocks in Hong Kong (as a control) and has found that these stamp duty adjustments have a significant impact on the relative turnover, volatility and effective spreads be- tween Mainland China and Hong Kong. However, the research finds little evidence to suggest that stamp duty has been an effective tool to discourage short term speculation in the Mainland Chinese markets. The Shanghai and Shenzhen stock markets are Mainland China’s two stock markets. Since they were established in 1990 the stamp duty rate has been adjusted 18 times between a range of 0.1% to 1.2% per round trip transaction (Both buy and sell). The study examines the impact of the four most recent stamp duty adjustments on the Mainland Chinese stock markets compared to the Hong Kong market by using cross-listed stocks during an 8.5 year period when the stamp duty rate in Hong Kong has remained the same. The last four changes in Mainland China have included a stamp duty cut from 0.4% to 0.2%, a large rise from 0.2 to 0.6%, a large cut from 0.6 to 0.2% and then the removal of stamp duty on the buy side. The study finds a negative impact of the relative stamp duty on the relative turnover rate, a positive impact of relative stamp duty is found on relative price volatility and a positive impact of relative stamp duty on relative spread. When the stamp duty rose from 0.2 to 0.6% in Mainland China for example this led to a 101.72% decrease in the overall relative turnover rate with Hong Kong, a 3.06% increase in overall relative price volatility and an 84.4% increase of overall relative spreads between Mainland China and Hong Kong. The findings of this research suggest that the rather dramatic changes to stamp duty rates in Mainland China has had an extremely large effect on relative turnover and spreads and stamp duty increases have actually raised rather than lowered stock price volatility by forcing liquidity traders out of the market leaving it dominated by short term speculators.
Author(s): Lynn Zhu
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