Chinese Stock Market Rockets 9%

China's beleaguered main stock index rocketed by more than 9% today after the Chinese government cut the tax on share trading in a bid to restore its fortunes.

The Shanghai Composite Index closed 9.3% higher at 3,583 points, its second largest rise this decade. Gaining stocks outnumbered losers by 892 to two, in a day of frenzied trading.

The smaller Shenzhen Composite Index also rose by 8.7%.

But with prices on the Shanghai index having fallen by half since last autumn's peak, today's much-needed boost left it down 31% for the year.

Analysts were cautious about the longer term prospects for shares.

"If the market leapfrogs like this, the rally will be exhausted in two or three days," Du Changyong, head of investment at Industrial Fund Management, told Reuters.

"The policy change helps market sentiment, but it doesn't change economic fundamentals. So though the market is generally considered to have found a floor for now, it's not unlikely for it to go lower in the long term if the economy worsens."

Morgan Stanley warned that the move was "a compromise with market speculators", adding: "We do not think such a rally can last. We advise investors to sell into strength."

Officials have cautioned that China faces a tough period as it continues to battle high inflation rates and the risk posed to exports by rising costs, the appreciation of the yuan and the credit crunch.

The authorities announced late on Wednesday that they were cutting stamp tax on share transactions from 0.3% to 0.1% - reversing an increase made 11 months ago, when the government was trying to cool surging prices.

"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 JP Morgan Chase, said in a note for clients.

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

While the reduction will have only a small effect on all but the largest traders, it sent a strong signal to the market.

Officials know that confidence in the Chinese stock market and the savings of large numbers of small investors are both at risk.

Today's rise will be particularly reassuring for the authorities after share trading restrictions announced at the weekend gave only the slightest boost to the Shanghai index on Monday, raising it by 0.7%.

An almost 10% rise in PetroChina shares, which account for about one-fifth of the benchmark's total value, helped account for today's increase. Officials announced earlier this week that they would compensate oil companies for losses due to price caps.

The Hong Kong stock market rose 1.3% to a three-month high on the back of Beijing's announcement today.