S&P hits new high despite plunge in Shanghai

A sharp fall in Chinese shares sent a shudder through global stock markets yesterday, as the communist leadership moved to curb the rampant speculation that has sent its stock market to record levels.

China's main share index, the Shanghai Composite, plunged 6.5 per cent after the government unexpectedly tripled the tax on stock transactions. The move, which increased stamp duty on share trading from 0.1 to 0.3 per cent, is aimed at gently deflating China's stock market bubble, which many have warned is in danger of bursting. The index closed down 281.8 at 4,053.1, its biggest one-day fall for three months.

The wave of selling evoked memories of late February, when tumbling Chinese stocks triggered a global equities sell-off and risk-aversion swept through financial markets. But while stock markets wobbled yesterday, they avoided the rout that many had feared and the nerve-racking day ended with an increased confidence that any correction in Chinese markets will be contained in that country.

The FTSE 100 index was off 73 points at one stage, but regained its poise to close only 4.4 down at 6,602.1. On Wall Street, the Dow Jones Industrial Average was down 64 at 13,457 in afternoon trade, but recovered to set a new record of 13,633.1.

And the S&P 500, America's broadest stock market index and the measure most closely followed by Wall Street professionals, broke through the previous all-time closing high, which it had set at the peak of the dotcom bubble in March 2000. It closed up 12.12 at 1,530.23.

The rise in Chinese equities has been meteoric. Shares have leapt by 62 per cent to record highs this year, building on last year's stellar performance, when they rose by 130 per cent.

The gains have been driven largely by strong demand from domestic investors. Instead of leaving their savings in bank accounts, many people are now using the cash to buy shares in the hope of receiving better returns. According to some estimates, a staggering 300,000 people a day opened brokerage accounts in China last week.

Policymakers are concerned that an army of novice investors could suffer heavy losses in the event of a meltdown. Alan Greenspan, the former Federal Reserve chairman, warned last week the bull-run was "clearly unsustainable" and there would be a "dramatic contraction".

Analysts said that, by targeting the speculators who have accounted for the bulk of turnover in recent weeks, the tax increase would hit share prices in the short term. But they did not expect the market to crash or spark a more widespread sell-off.

"I'm not dramatically worried," Edward Menashy, a strategist at brokers Charles Stanley, said. "Beijing is not going to stop speculators by raising stamp duty by this very small amount. Price-earnings ratios are uncomfortably high so you are going to get sell-offs from time to time, but I don't think this will knock the market much lower."

The sell-off came as the World Bank issued an upbeat assessment of China's economy. It lifted its 2007 growth forecast from 9.6 to 10.4 per cent, saying the economy did not appear to be bubbling over and there was no obvious need for policy tightening measures. "From the macroeconomic perspective, the real economy does not appear overheated," it said.