China’s Ministry of Finance surprised the markets by announcing a rise on stamp tax on securities trading to three yuan per thousand yuan of share values. The statement was released at midnight trough the official Xinhua news agency but the full market impact should only be felt when the Chinese stock market opens tomorrow at 9:30AM local time. Yet, the consequences of the release were already seen in the U.S. stock market. The Dow Jones Industrial erased earlier gains and fell almost 100 points from the intraday high once traders had a February 27 Déjà vu. In the last two decades, an increase in stamp duty has always caused a plunge in the Chinese stock market over the following weeks. Today’s surprise announcement on higher taxes for securities trading could be the beginning of the end for the Chinese stock market bubble and have serious implications for financial markets across the world.

Chinese Stock Markets hit an all-time high. Is this the calm before the storm?

The Shanghai Composite Index closed at 4,334.92, nearly 1.5 percent higher than Monday, led by expectations of strong earnings on big caps in the months ahead. In today’s trading, 18 stocks reached the daily trading limit and many had two figures rises. Zhejiang King Refrigeration Industry Co Ltd rose nearly 10 percent to 11.28, Jinling Hotel Corp Ltd was up by 10.03 percent to 15.69 yuan and Southwest Pharmaceutical Co Ltd jumped 10.02 percent to 14.93 yuan. The value of shares that changed hands reached 251.2 billion yuan compared with 261.58 billion yuan on Monday. The Chinese stock market has been enjoying spectacular gains since February 27, when the market collapsed nearly 10%, but the Chinese authorities don’t share the same opinion of investors and for several occasions have expressed concern about increasing speculation in the Chinese stock market.

Yuan Closes Lower on Stronger Than Expected US Consumer Confidence

The yuan lost some ground against the dollar, closing at 7.6497, down from 7.6450 on Monday. The dollar rebounded higher, after the release of a stronger than expected consumer confidence survey, on speculation the Federal Reserve will not be cutting interest rates in 2007. Still, most dealers believe this move today was just a small technical correction and the underlying yuan appreciation remains well supported in the weeks ahead. In fact, one year onshore yuan forwards traded at 7.2787 to the dollar, anticipating the yuan would be 4.8 percent stronger in one year's time. Both the Hong Kong dollar and the Singapore dollar finished the session nearly unchanged at 7.8203 and 1.5279 respectively.

Antonio Sousa is a Currency Analyst for FXCM.