Sept. 18 (Bloomberg) -- China will scrap the tax on stock purchases and buy shares in three of the largest state-owned banks to shore up investor confidence in the world's second worst-performing stock market this year.

China Investment Corp., the nation's $200 billion sovereign wealth fund, will buy stakes in Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., the official Xinhua News Agency said in an announcement today. The 0.1 percent stock transaction duty will be removed for purchases and levied only on sales starting tomorrow, it said.

The CSI 300 Index slumped 64 percent this year as an equity bubble deflated and the economy slowed, undermining earnings growth. Industrial & Commercial Bank of China yesterday ceded its position as the world's most valuable bank to HSBC Holdings Plc after shrinking by $241 billion in less than a year.

``The stock market has fallen too much,'' said Frank Gong, chief China economist at JPMorgan Chase & Co. in Hong Kong. ``There will be more measures to support the economy, like fiscal stimulus and easing of monetary policy.''

Today's measures come three days after the central bank cut interest rates for the first time in six years and allowed most banks to set aside smaller reserves.

The government failed to halt the market's slide this year after cutting stamp duty from 0.3 percent on April 23 and restricting share sales. The CSI 300 surged almost sevenfold between July 2005 and its peak on Oct. 16 last year, becoming the world's most expensive market relative to earnings.

`More Effective'

``They've used the stamp duty before,'' said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. ``What's different this time is the decision to let CIC to buy bank shares, which will be more effective in saving the market. This will help put a floor'' under the market, he said.

CIC's unit Central Huijin Investment Co. will begin buying shares in the banks in the secondary market immediately, according to the Xinhua announcement. The agency didn't say how much Central Huijin, which already controls the nation's largest banks, may invest or give further details.

Chinese stocks rebounded in the afternoon trading session after plunging earlier. ICBC's Shanghai-traded shares closed 0.6 percent higher after tumbling as much as 8.5 percent. Bank of China rose 2.7 after dropping 5 percent and China Construction Bank closed 0.5 percent lower after losing 9.7 percent.

China's banks mostly avoided the credit-market crisis that has rattled global stock markets, accounting for less than 1 percent of the $516 billion of losses and writedowns worldwide. ICBC earned a record 64.5 billion yuan ($9.42 billion) in the first half to become the world's most profitable bank.

`Proactive Approach'

Still, ICBC shares have fallen 58 percent this year in Shanghai, while Construction Bank has slumped 61 percent and Bank of China is down 54 percent.

Failure to stem the slide in China's stock market puts corporate earnings at risk. A fifth of profits at Chinese companies in 2007 were from investment gains, according to the finance ministry. The 1,570 companies listed on the Shanghai and Shenzhen stock markets reported a 50 percent increases in profit last year, it said.

``This move signals the government's more proactive approach towards restoring market sentiment,'' said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan. ``Going forward, additional measures to boost the market could include the establishment of a stabilization fund for the domestic market and further reform of the rules pertaining to the sale of previously non-tradable shares.''

JPMorgan analysts were ranked the best China researchers by Institutional Investor magazine's fund manager survey this year.

The Ukraine PFTS Index is the worst-performing of 88 benchmark indexes tracked by Bloomberg, down 69 percent this year.

To contact the reporter on this story: Wing-Gar Cheng in Beijing at wgcheng@bloomberg.net; Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net;

Last Updated: September 18, 2008 10:02 EDT