Trader’s Narrative

A “stamp duty” or “stamp tax” is an archaic form of tax which is basically a prerequisite for a document to become legally binding. For example, where levied, you would have to pay a stamp duty when you buy a house to have the deed reflect the new buyer’s claim on the property. Or when you buy stocks, to reflect the new owner.

Only a few developed places levy such taxes anymore: UK, Ireland, Australia and Hong Kong (now part of China). Usually the level of the tax is left untouched. In England for example, it has been at 0.5% since 1986.

But in China not only is it levied, stamp duties are one of the dials that the communist beaurocrats love to tweak up and down. The latest “tweak” was the announcement last week that it would be tripled to 0.3% effective this Wednesday (June 6th 2007).

I showed this graph before to demonstrate that there had been an even crazier bull market in China in the early 1990’s. In this new version it shows the dates of the previous stamp duty or stamp tax changes:

I think it is fairly probable that this increase in transaction costs will greatly reduce the mania in the Chinese equities market. It may not cause a full blown crash - although the market is down overnight as I type and is at a five week low. If you want to play the Chinese market here’s how to play it from the US.

The real question now is, where will all that money flow next? You can’t dam capital. It will find its way out, one way or the other. All you can do is try your darndest to channel it.

If they ask me (and they haven’t) I would say open the gates so that the Chinese can invest outside China.