April 23 (Bloomberg) -- China cut the tax on share trading to support stocks after a 35 percent plunge in the benchmark index, the world's second-worst performing this year.

Stamp duty charged on stock trades will be lowered to 0.1 percent from 0.3 percent effective tomorrow, the government said in a statement on its Web site after the close of trading today.

The CSI 300 Index rose 4.8 percent before the announcement on speculation the government would seek to revive confidence after $1.9 trillion was wiped from the value of equities this year. The index, which surged sixfold in 2006 and 2007, has slumped on concern efforts to stem inflation close to an 11-year high will curb earnings growth.

``This is the most effective thing the government could have done in the short term to give the market more confidence,'' said Michelle Qi, a portfolio manager at Bank of Communications Schroders Fund Management Co. in Shanghai, which oversees $7 billion. ``I don't think we're going to rise above where we ended last year though because in the end, it's still about economic conditions.''

The reduction, which reverses a tripling of the tax last year, had been predicted by the state-run China Business Journal and analysts including Jing Ulrich, Hong Kong-based chairman of China equities at JPMorgan Chase & Co.

The government raised stamp duty to 0.3 percent on May 30, 2007, to cool a rally that was drawing more than 300,000 new investors a day. The CSI 300 closed today at 3453.73, 17 percent below its level on May 29.

`Clear Signal'

``The market will bottom out,'' said Wei Wei, an analyst at West China Securities Co. in Shanghai. ``It's a clear signal from the government that it thinks of the decline as overdone.''

So far, measures to boost stocks have failed to stem the decline. The government said on the weekend shareholders selling more than 1 percent of a stock within a month must do so in single trades, keeping the transactions off the open market to support equity valuations.

China Southern Airlines Co., the nation's biggest carrier, has lost 61 percent of its value this year, the biggest decliner among the 300 stocks on the CSI index. PetroChina Co., the world's first $1 trillion company, has slumped 47 percent, falling below its November offering price in Shanghai.

The Shanghai Composite Index, which tracks the larger of China's two stock markets, dropped to 50 percent below its October record yesterday.

Valuation Gap

China's stocks remain the most expensive relative to earnings among markets in Asia tracked by Bloomberg. The CSI 300 is valued at 26 times reported earnings, compared with 16 times for Japan's Nikkei-225 Stock Average and 15 times for Hong Kong's Hang Seng Index. The S&P 500 Index is trading at 22 times earnings.

Stocks surged after a four-year bear market ended in July 2005 as the government implemented a plan to make state-owned shares tradable. The rally has lost steam on concern earnings growth will slow and new share sales by companies including Ping An Insurance (Group) Co. will overwhelm demand.

China's consumer prices rose 8.3 percent in March as food costs jumped and after the worst snowstorms in half a century destroyed crops and paralyzed transport.

Premier Wen Jiabao pledged ``forceful'' measures last month to tame inflation. The central bank told commercial banks to set aside more reserves for a third time this year on April 16, and three days earlier Governor Zhou Xiaochuan said there's still room to raise interest rates.

``The economic environment -- higher inflation and tighter monetary policy -- is not positive for the stock market,'' said Stephen Green, head of China research at Standard Chartered Plc in Shanghai. ``The government is becoming more ambitious about calming the market.''

Economic Growth

China's stock market peaked in value on Jan. 14 at $4.8 trillion and had lost $1.9 trillion through yesterday, equivalent to the value of Canada and Germany's stock markets.

The Shanghai Composite rose 4.2 percent to close at 3278.33, and is 46 percent below its October peak. The Shenzhen Composite Index climbed 4.9 percent to 960.214.

``We will see the Shanghai Composite Index climb to around 4,000 points on the news,'' said Wu Kan, a fund manager at Dazhong Insurance Co. in Shanghai. ``How far the market will rise depends on whether the government will successfully curb inflation and avoid slowing economic growth too much.''

China's economy, the world's fourth largest, grew 10.6 percent from a year earlier in the first three months, expanding by more than 10 percent for a ninth straight quarter.

``The markets have fallen a long way but while inflation is high, growth is still robust so there are strong fundamentals to support the market,'' said Ben Simpfendorfer, strategist at Royal Bank of Scotland in Hong Kong.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

Last Updated: April 23, 2008 10:30 EDT