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China May Abolish Tax On Interest

by Mary Swire,, Hong Kong

28 June 2007

China's highest legislative body yesterday began reviewing a proposal to abolish tax on interest, another move in the government's strategy aimed at taking the heat out of the booming stock markets.

The National Peoples Congress reportedly began examining the proposal earlier this week, and could vote on the measure on Friday. The intention behind the move to axe or reduce the 20% tax on savings income is to encourage more small Chinese investors to put their money in the bank rather than invest it in the stock market.

Following a long period of stagnation, when the government actively encouraged more investment in the stock market, the value of shares traded in China has soared over the last eighteen months, with prices increasing 60% this year, on top of 130% last year. This rally has recently been underpinned by millions of ordinary Chinese investors putting their savings into equities.

Beijing is worried that this rally will be ultimately unsustainable, leading to a possible crash which could have ramifications throughout the wider economy. Last month, the stamp duty tax charged on share dealings was increased three-fold to 0.3%, an action which had the short-term effect of depressing share prices. However, China's main stock index is still up well over 50% this year.

When rumours of the interest tax move reached the market late last week, the benchmark Shanghai Composite Index dropped by almost 300 points, and the index had dipped below 4,000 points by Monday's close. But Beijing is looking for a longer-term solution to avert a stock market bubble, and according to a report by the state news service Xinhua, it is likely to approve a cut in interest tax by an initial 10%.

"If the government is authorized, I believe it may cut the tax on interest income to 10 percent from the original 20 percent," Li Zhikun, an analyst with China Jianyin Investment Securities Co Ltd, was quoted as stating. Li added that this would be the equivalent of the government raising the interest rate on bank savings by 76.5 basis points.

The revenue loss from halving interest tax is expected to be easily absorbed by the government, as the booming economy continues to fuel massive growth in tax receipts.

"Under this kind of situation, the country's fiscal (situation) can withstand the halt or reduction of the interest income tax," Finance Minister Jin Renqing remarked on Wednesday according to Xinhua, which also reported Jin as revealing that tax revenues in the first five months of this year rose nearly 24% to 2.172 trillion yuan, already well over half of last year's total revenues.

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