Still enough cushion for China stocks soft landing

By Charlie Zhu

SHANGHAI (Reuters) - As Shanghai's main stock index (.SSEC: Quote, Profile, Research) plunged another 8 percent on Monday, fears grew that policymakers misjudged last week's bid to cool the market, but analysts say there's still enough cushioning for a soft landing.

The Shanghai index has lost 15 percent since Wednesday, when the government raised the share trading tax. The aim was not to burst the speculative stock bubble but to trigger a gentle deflation, avoiding an extended bear market that could drive investors away for the long term, damage the economy and even prompt social unrest.

In an apparent effort to calm investors, China's three major state-owned business newspapers ran front-page editorials on Monday declaring that the tax hike would not change the market's positive medium- and long-term outlook.

So Monday's plunge, the second-biggest drop this decade, raised concern that the situation might have spiralled beyond the authorities' ability to control it.

"The Chinese government is just trying to rein in speculation and stop the market from going up too quickly. They did not expect the reaction to the tax would be so big," said Xia Xiaohui, chief executive of private investment fund Fair Capital.

Some fund managers said another tumble of 5 percent or more on Tuesday could send the market into a freefall, as even institutional investors, which focus on longer-term investment, might start selling heavily to cut losses.

Millions of individuals have entered the market in recent months to join a bull run that took the index up 273 percent between the start of 2006 and last week's record high of 4,335.963.

The problem is not that these investors disbelieve the government's assurance about the market's longer-term uptrend, it's that they might not want to wait around for the longer term if the short-term trend is no longer up, analysts said.