Hong Kong's benchmark Hang Seng Index fell 175 points to 20,293 yesterday, sparked by central government cooling measures.

The Hang Seng dropped nearly 300 points in early trading yesterday, before recovering in the afternoon session, after the government raised the stamp duty on securities to 0.3 percent from 0.1 percent on Tuesday. The news sparked a sharp drop in the A-share market yesterday.

However, analysts said the central government's cooling measures will not significantly damage Hong Kong because of the market's strong economic fundamentals.

Major index movers China Life and China Mobile dragged the index down 55 points in the early session, while three Hong Kong-listed mainland insurers, including China Life, Ping An Insurance and PICC, each tumbled more than 4 percent.

However, HSBC's share price stayed flat during the downturn, closing at HK$144.

A man watches share movement on a board displaying the Hang Seng Index in Hong Kong yesterday. The index closed down 0.86 percent after the central government's cooling measures took effect.

Most blue-chip stocks suffered yesterday, with CNOOC and Sinopec down 2.6 percent and 1.24 percent to HK$7.12 and HK$7.98 respectively.

Analysts and economists said the austerity measure could effectively cool down the mainland stock market, but should not cause panic among Hong Kong investors.

"The rising stamp duty creates more of a psychological than pragmatic effect," said Tao Dong, chief regional economist of Credit Suisse First Boston. Tao believes the central government will reduce its holding of State-owned shares to dampen the market and expects interest rates to rise three to four times by the end of the year.

"The outlook of the Hong Kong market depends on the performance of A shares to some extent, even though the two market's movements are not directly proportional," said Patrick Yiu, associate director of CASH Asset Management.

Terence Chong, associate professor of the Chinese University of Hong Kong said: "The increase in the stamp duty is expected to be a one-time policy. No further cooling measures seem on the horizon in the short run. Also, the mainland regulator will prefer using alternative approaches to curb the equity markets next time."

Hong Kong wasn't the only market hit by the stamp duty hike. Stocks across Asia fell yesterday for the first time in three days.

"Today's correction in mainland shares is causing a knee-jerk reaction across Asia," said Shane Oliver of AMP Capital Investors in Sydney. "Markets have become skittish on this type of news given some of the extreme reactions in recent history."

The Morgan Stanley Capital International Asia-Pacific Index slid 0.6 percent to 148.25 in Tokyo, snapping a two- day, 0.9 percent advance.

Japan's Nikkei 225 Stock Average lost 0.5 percent. Benchmarks declined around the region yesterday, except in South Korea, Pakistan, Sri Lanka and Thailand, where the SET Index rose to a five-month high.

(China Daily 05/31/2007 page13)

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