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Chinese Tax Rumours Wipe Billions From Global Share Values

by Mary Swire,, Hong Kong

01 March 2007

World stock markets struggled to recover yesterday as the Chinese government moved to deny rumours that it was planning taxes on stock market investment, causing panic among domestic and global traders already nervous that Beijing may put the brakes on the rampant Chinese economy.

Citing an official from within the Finance Ministry, the Shanghai Securities News, which is owned by the Xinhua government news agency, carried a report on Wednesday that the government has no plans to impose a 20% capital gains on stock investments.

It is thought that rumours about the tax surfaced after Beijing had employed similar tactics to curb rampant speculation in the real estate market in certain cities such as Shanghai, although these have met with mixed success. Chinese stock markets have recovered strongly, gaining about 130% in 2006 after hitting a five-year low last year.

In addition, plans announced at the end of last year to require high income individuals to report their stock gains as part of plans to increase the tax burden on the wealthy also fed the speculation, causing the Shanghai and Shehnzen markets to tumble by almost 9% on Tuesday - the largest daily fall in a decade. According to the government official, this was based on a mistaken belief on the part of traders, and he told the paper that "the earnings in stocks transfers and whether to levy tax on the earnings are two separate issues."

The Chinese government has no desperate need to raise additional money from taxes, with a record 3.8 trillion yuan (US$486 billion) in revenues having been collected during 2006 - 22% higher than in 2005, itself a record at the time.

However, with international investors becoming increasingly nervous that the Chinese government will soon impose measures to cool China's rapidly growing economy, the news of the Chinese stock market plunge - which has already been dubbed 'Black Tuesday' by China's traders - caused a domino effect around the world. In New York, the Dow Jones Industrial Average suffered its largest one-day fall since the September 11, 2001 attacks. European markets also suffered as the London FTSE100, the German DAX and the French CAC indices also plunged.

Although a 20% capital gains tax on share sale profits is on the statute book in China, it has not been enforced since 1994 as the government attempted to encourage investor interest in the domestic securities market. According to the official, there has been "no change in the attitude of the State Administration of Taxation" regarding this law.

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