Shanghai stocks surged more than nine per cent today after a government cut in stamp tax apparently aimed at ending a bear market during which share prices halved in value in six months.

It was the second government policy this week to try to stem the slide in share prices.

Investors responded with enthusiasm, assuming that the authorities may want to halt the bloodbath before the Beijing Olympics and to put a floor under the market at about 3,000 points.

However, high inflation and the threat of a slowdown in China’s sky-high economic growth rates could continue to put the brakes on any attempt at a significant revival in stock prices.

The benchmark Shanghai Composite Index closed 9.29 per cent higher at 3,583.028 points, posting its second-biggest rise this decade, after jumping as much as 9.60 per cent in early trade.

Most Shanghai shares rose by their 10 per cent daily limits. Turnover in domestically traded Shanghai A shares more than doubled to 188.5 billion yuan ($27.0 billion), the largest amount since last October, reaching levels seen during the height of China’s stock market bull run last year.

The index soared more than sixfold between June 2005 and last October's record peak, but then plunged 51 per cent to a 13-month low of 2,990.788 points on Tuesday amid rising inflation and heavy supplies of new equity.

The reduction in the stamp tax, to 0.1 per cent from 0.3 per cent, will make little difference to the investment costs of all but the most active traders but it had an immediate psychological impact.

The Government raised the tax to 0.3 per cent on May 30 last year.

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

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