Chinese authorities are increasingly concerned about the sizzling growth in stock markets. They are not alone. Regulators elsewhere worry that a slump in China will spread around the world. Thus last week's decision to increase taxes on share transactions was met with equal amounts of applause and apprehension. The Shanghai market dipped, but the effects were contained. If the past is any precedent, however, the move will prove insufficient. Tougher — and riskier — steps will be needed.
Investors have been ecstatic as the Shanghai stock market rose 130 percent last year. Government officials, however, worried that dizzying growth would exact a greater toll when the inevitable correction came. With Chinese investors opening more than 100,000 trading accounts daily, authorities feared that a market drop would cause a catastrophic loss of wealth and threaten social stability. Economists worried that a correction in China would have international consequences.
To dampen the fever in China, the government last week tripled a duty on share transactions, raising it from 0.1 to 0.3 percent. This triggered a selloff that depressed prices about 6.5 percent. Regulators held their breath, but other markets shrugged off the correction.
Share prices have risen 33 percent since the February correction; they are up 62 percent over the first six months of 2007. The World Bank just increased its forecast for Chinese growth for this year from 9.6 percent to 10.4 percent. The supply of money is now projected to expand 17 percent, a 1 percentage point increase from the earlier forecast.
In other words, there is still plenty to fuel China's red-hot expansion in the real economy and in the markets. While it is proving increasingly difficult, a slowdown is inevitable. Chinese authorities must regain control. Just as important, other governments need to be prepared to contain the shock when the correction occurs.