A Timely Update from Our Ace Asian Analysts on the Power of SanTong

Share prices in mainland China soared 16% this week - with the benchmark CSI 300 Index gaining over 9% on Thursday alone – the largest single-day gain ever recorded.

It’s clear that Beijing is serious in its attempt to put a “floor of support” under mainland stock markets in Shanghai and Shenzhen. China’s two mainland stock exchanges have lost about 50% of their market value since October 2007.

That’s an amazing $1.7 trillion in wealth destruction… it makes the subprime credit crunch losses of $300 billion seem like peanuts in comparison.

Beijing Pulls Out All the Stops

To follow up on an earlier blog post (China Shares Get Cut in Half, But Don't Panic Just Yet), the catalyst for this week’s strong rally was Beijing’s cut in taxes on stock trading, or the “stamp duty”, a move that was widely expected.

Less well know however, China has made some other moves recently that indicate a coordinated move by the authorities to shore up China capital markets.

We're fortunate to have friends like Jack Flader, at Global Consultants and Services Limited (GCSL) in Hong Kong, who bring us "local intelligence" on what's really going on in this dynamic part of the world. According to GCSL, other rule changes in China could help sustain this rally.

Johnson Chien, who holds the fort in GCSLs Shanghai office, writes: “Mutual fund companies in China will temporarily be exempt from corporate tax for their stock market investment revenue which includes profits from stock and bond trading.”

So in addition to much lower transaction costs for retail investors, thanks to the cut in the stamp duty, China’s institutional investors are getting a very big tax cut too. In addition to the tax cuts, Beijing recently tripled the amount of foreign investments allowed to flow into mainland shares to $30 billion.

Also, Chinese regulators just opened the sale of new mutual funds to mainland retail investors, after a five-month hiatus. Meaning even more retail cash is likely to flow into the mainland markets soon.

Will SanTong Provide a Catalyst for More Chinese Stock Gains?

Johnson also makes a bullish case for Taiwan, which reinforces my own views. The landslide victory of the KMT in recent elections sends a clear signal that “the policy of SanTong between Taiwan and China will come to fruition,” according to GCSLs analysis.

SanTong  is taken “from the ‘Cross-Straits Act’ which was discussed between Taiwan and China 10 years ago.” This early-stage economic détente between China and Taiwan sought to liberalize transportation and trade links between the two. Another aim is to reduce business investment restrictions across the Taiwan Strait.

Well, Taiwan’s recent election result paves the way for SanTong in a big way. In fact, the desire for economic reconciliation between the two is crystal clear in the US$3billion in cash that returned to Taiwan in the days after the election.

This post-election cash influx triggerd a huge spike in the Taiwan dollar – which has risen nearly 7% in US dollar terms in just two months! And these capital flows are rapidly finding their way into Taiwan stocks as well.

According to GCSLs Johnson Chien, “The central bank of Taiwan is now expecting another infusion of US$20 billion.”

It looks to me like both Taiwan stocks - AND the currency - are good BUY candidates right now!