The measure took effect on Thursday and had an immediate impact with gainers overwhelming losers by 880 to one and more than 350 stocks hitting their 10 per cent daily limits.
The index surged as much as 9.6 per cent to 3,593.2 in morning trade as investors resumed buying after weeks of holding back in hopes of market-boosting news.
Jing Ulrich, chairwoman of China equities for JPMorgan Chase & Co, told AFP the lowering of the stamp duty “is among the most aggressive steps the government could have taken to improve sentiment”.
The Shanghai bourse had soared more than six-fold between June 2005 and last October’s record peak.
It then plunged 51 per cent reaching a 13-month low on Tuesday of 2,990.788 points, hit by rising inflation, the threat of an economic slowdown this year, and a large amount of previously non-traded shares.
Alarmed by an 11 per cent slide in the Shanghai index in the just the last week, the China Securities Regulatory Commission had also announced new restrictions on sales of large blocks of shares newly freed from lock-in periods on Sunday.
The move was aimed at reassuring investors worried about some $430bn in previously non-traded shares due to flood the market this year.
But it seemed to do little to spur buying and for the first time in more than a year, the Shanghai bourse dropped below 3,000 points on Tuesday before rebounding later in the day.
Analysts say the cut stamp duty will make little difference to the investment costs of anyone but the most active traders.
Nonetheless the move is being seen as a signal that the authorities want to stop the index from dropping below 3,000 points, which could damage the economy and possibly trigger social unrest.