A long-awaited rally took place on China's stock market Monday thanks to the nation's stamp tax cut, but analysts said this recovery may be short-lived if it is not followed up with more concrete policies to upgrade the market structure and fundamentals.

China's Ministry of Finance announced late on Sunday that duties levied on A-share and B-share transactions would be halved to 0.1 percent starting from Monday.

This was the first cut in the stock trading duty in China since November 2001, when the tax was lowered to 0.2 percent.

The latest cut, aimed at revitalizing investors' sentiment and cutting trading costs, pulled up stock indices yesterday.

Shanghai's composite index rose 1.73 percent to close at 1,255.777, while Shenzhen's sub-composite index also advanced 1.82 percent to end at 3,111.40.

The stamp tax cut certainly helped boost market sentiment yesterday, said Xu Gang, general manager of the research department at CITIC Securities Co.

However, this cut alone is unlikely to support a sustained growth in the market, Xu said.

"Investors are still seeking more concrete solutions to the irrational share structure in the bourses," he said.

Xu's view is echoed by many analysts and investors, concerned by the bearish performance of China's stock market over the past three years.

The Shanghai composite index shed 15.4 percent in 2004, bringing investor confidence to a new low.

Even policy measures such as the enactment of State Council guidelines to support the capital market's development have only provided market indices with a short-term boost.

Yesterday's market rally is more of a psychological one, said Li Yongsen, a professor at the Finance and Securities Institute of Renmin University of China.

Although the impact of the duty cut on stock trading is limited, it revives hopes that the government will introduce reforms to rescue the bourses, Li added.

It send a positive signal to the market that the government is considering measures to repair investors' confidence, he said.

Exactly what new policies will be adopted, their implementation and timing are major factors affecting market trends in the medium term, analysts said.

"Personally, the stamp tax cut will not have a great impact on my investment plans. I do not have much to lose or gain anyway," said one investor.

"But we do want to see reforms that are more concrete and systematic, something that would really change the fundamentals," he said.

One reform that investors are hoping to see is an end to the split share structure resulting from the planned economy. This refers to the existence of a large volume of non-tradable State and legal personal shares and the fact that only about one-third of the shares in domestically listed companies are floated on the market.

Such an irrational structure has put the public investors at a worse position than the actual controllers of the listed companies in making corporate policies and disposing of the companies' profits and assets.

Investors are expecting the government to at least set up an experimental programme to reduce and float the non-tradable shares, said Xu Gang from CITIC Securities.

But it will be hard for the related departments to reach a consensus on this issue in the near future, he said.

The Chinese Government once tried a pilot scheme to sell some state holdings in companies launching initial public offerings in June 2001 in order to finance the social security sector, but scrapped the programme a year later as stock indices continued to head south on investors' complaints that the State holdings were being sold at too high a price.

The authorities are still looking for ways to bring out a plan that would be widely accepted in the market, but have been unable to offer one so far.

Although there has been speculation recently over a new experiment on the reduction and circulation of the state holdings, this has yet to be confirmed by the authorities.

There also has been talk that the government might come up with more rescue plans for the bourses, including launching a stock stabilization fund, through which the authorities can intervene in the stock market to curb irrational market falls.

(China Daily January 25, 2004)