Only days after Beijing warned listed companies against issuing excessive amounts of new shares, rumors emerged that the Finance Ministry might slash the current stamp tax on equity transactions in March, China Economy reported Feb. 27. This warning and rumored stamp tax cut indicate that the Chinese government is stepping up efforts to shore up equity investor confidence. It is worried that the recent dip in Chinese stock prices, which typically happens at the beginning of each Chinese New Year when investors cash in on shares for extra spending money, will not be as easy to shake off as past price downswings. In contrast to Western equity markets that act as vehicles for encouraging economic activity, China’s equity markets are a combination of savings accounts and forms of gambling. This means people play the markets for fundamentally different reasons in China than they do in the West. This difference makes the market's performance of far greater social importance to the Chinese, since the measure of market performance in China is also a measure of social stability. So Beijing keeps a watchful eye on Shanghai and Shenzhen stock prices at all times. The issuance of an excessively large number of new shares typically pushes down stock prices; investors worry that there will not be enough cash in the markets to absorb so many new shares. Thus, the Feb. 25 warning was designed to boost investor confidence. The leaking of rumored government policy is a tried-and-true Beijing tool for engineering Chinese shareholder activity. When rumors of a stamp tax increase came a year ago, China's stock prices took a record plunge, as was intended. This time around, however, the rumors are designed to halt and/or reverse the current abnormally long slide in the benchmark Shanghai stock index, which has plummeted 24 percent since mid-January. Of the many factors driving the current slide in Chinese stock prices, four stand out. The first is the contagion-like effect of global investor confidence on Chinese investor sentiment, which is being dragged down by the continued U.S. subprime crisis. The second factor is the way in which China’s record-high inflation — exacerbated by January’s snow disaster and spiraling global energy prices — is decreasing consumer confidence across the board. The Bank of China (BOC) is forecasting February’s consumer price index to hit another new high of between 8.3 percent and 8.7 percent. Moreover, the inflation is no longer confined to food; other essentials like coal and transportation are being affected, so both the poor and the rich are getting hit. To emphasize to a worried public the priority status granted to this issue, Beijing plans to replace its flagship anti-corruption campaign with an anti-inflation campaign at the National People’s Congress in March. The third factor is the prospect of interest rate increases, which make loans and cash more expensive for investors to put aside in equities. In the face of such high rates of inflation, the BOC already has forecast that the Chinese central bank will have no choice but to increase rates again in March. Last but not least is the scramble of Chinese companies looking to raise money by issuing new shares on mainland stock markets. Whether this scramble is based on the companies’ belief that this is their last chance to tap into equity funds before markets take an almighty plunge is unclear. Of these factors, the most critical to watch will be inflation. The other three largely can be contained with a mix of administrative measures and well-timed policy rumors. Inflation, however, is something that remains outside Beijing’s direct control because of its external origins: global energy prices and unforeseen weather conditions. If China’s stock market takes a severe dive, the social repercussions will be serious. Chinese shareholders have yet to wake up to the fact that they are putting their life savings into an overheated and volatile market for lack of better alternatives. Based on a November 2007 survey conducted by Kapronasia and Amber, seven-tenths of Chinese investors believe that Shanghai’s stock market is overheated, but more than two-thirds of them continue to sink their life savings into it. With 66 percent of this sample group of Chinese shareholders owning property and 34 percent holding mortgages, any bursting of the Chinese stock market bubble quickly would spill over into China’s similarly unstable and overheated real estate market. In other words, if the current Chinese equity slide is not halted, a domino effect could ripple through many Chinese sectors and hurt much of the country’s middle to upper-middle class.