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China: Beijing's war on the stock markets

April is the cruellest month, wrote TS Eliot. Chinese investors may beg to differ. They found May pretty cruel. In the past month the Beijing authorities have declared war on China's two principal stock markets, rattled by alleged speculation. This had carried the Shanghai domestic share index to gains of 55% since January, and pushed Shenzhen up 75%. By the time Beijing decided to act the two markets were on P/E ratios of nearly 50 times historical earnings. But at first Beijing's usually subtle hints had no impact on a market convinced of its own immortality.

This differed markedly from its response last December when an editorial in the Communist Party mouthpiece, The People's Daily, was sufficient to cool speculation. The article predicted a crash. The next day the market fell 10%. Local brokers referred to it as the securities industry's June 4 ­ a reference to Tiananmen Square in 1989. But that description is more apt for the tactics employed this time round.

Beijing began its offensive on May 5 when it revised its 1996 quota for new listings, raising it from RMB billion ($1.1 billion) to RBM15 billion.

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