Shanghai Selling Continues, Investors Fear Further Tax Legislation
The bears continued to pummel the market on the session following an intermediate bounce back yesterday. Lending to continued market jitters was speculation surrounding the likelihood that government officials would once again attempt to tighten liquidity through tax measures. Now, with the stamp tax already being announced, concerns were afloat that a considerable capital gains tax may be implemented in the short term in addition to further hike adjustment on benchmark interest rates. As a result, the CSI slid another 3.2 percent to close ahead of the weekend at 3,803.95. Although the market can expect further tightening measures by the government to curb speculative flows, consensus sentiment remains flat on the likelihood of a capital gains tax. Incidentally, the Taiwan economy met with similar fate as policy makers imposed a capital gains tax on investments almost 10 years ago. The ultimate decision took the key stock index lower for 19 consecutive sessions, depressing the benchmark index by almost 36 percent from a record high.



Chinese Manufacturing Advances Along
Manufacturing activity in the month of May rose to the highest level in over two years in the Hong Kong economy according to CLSA Asia Pacific Markets in Hong Kong. Built on a surge in lending, the purchasing managers index advanced to 54.1 compared to the 53.3 in the month of April. Showing expansion in the world’s fastest growing economy, the report continued to feed speculation that further liquidity tightening measures will be needed in order to curb speculation in the country. The results also play in to recent announcements that US congressmen are currently working on legislation in order to bring currencies back to fundamental levels. Seen as a ploy to fight a fixed valuation in the yuan, the move is also seen as a plausible starter to spark a trade war between the two economies. Separately, a manufacturing survey published by the National Bureau of Statistics and the China Federation of Logistics and Purchasing fell to 55.7 in the month. The lowest reading in three months, the survey is a simple dip from the two year high of 58.6 in April and continues to show support for expansion in the country.

PMI Growth Shows Improving Landscape In Hong Kong
The manufacturing landscape additionally improved in the Hong Kong economy, bolstered by private sector activity in the month of May. The monthly survey printed a 54.9, up from the 52.9 seen in all of April. Positive for the 29th consecutive month, the report reflected strong improvement in job creation, lending to the continually tight labor market for the economy. Subsequently, the survey indicated a strong pickup in new business from mainland China, showing the ever growing relationship between the two countries. As a result, figures are proof positive that further growth for the Hong Kong economy can be expected as business accelerates in the world’s fastest growing economy.

Regional Markets Mixed on the Session
Stock markets in the region were mixed on the day with Hong Kong stocks declining through till the close ahead of the weekend. Reversing gains seen yesterday, the Hang Seng was led lower by selling pressure n China Mobile Lt.d and China Petroleum & Chemical Corp. as profit taking was rumored to be continuing on the previous session rebound. As a result, the Index dipped 31.60 points to 20,602.87, posting a 0.4 percent gain for the week. Comparatively, the Straits Times Index was able to add 37.19 points, closing 1.1 percent higher at 3,548.32. Supporting the rebound in shares were gains in Oversea Chinese Banking Corp. Shares of the regional lender bounced back after a 1.6 percent dip, finishing higher by 2.1 percent at S$9.60.

Richard Lee is a Currency Strategist at FXCM.