Beijing scraps tax on trading account interest

PUBLISHED : Monday, 27 October, 2008, 12:00am
UPDATED : Monday, 27 October, 2008, 12:00am

The central government has scrapped the tax individuals pay on interest earned on stock settlement funds, in the latest stimulus measure to boost the equity market and encourage consumption in the face of a global economic downturn.

The Ministry of Finance yesterday said a previous move to end the 5 per cent withholding tax on bank deposit interest income would also apply to cash held in securities accounts.

Investors do not have to pay tax on interest income accumulated from their settlement funds from October 9, according to the ministry.

The decision was aimed at maintaining a stable and healthy development of the capital market, Xinhua said, adding that the monetary policy loosening highlighted Beijing's rising concern about the slowing economy and slumping capital market.

'It is a further gesture that the central government wants to help the falling stock market but the effectiveness will be limited,' said Liao Qun, a Citic Ka Wah Bank economist, who added that it would not save investors much money.

Beijing had announced a series of measures to revive the nation's stock market, which had lost about 67 per cent this year.

They included cutting stamp duty, limiting the sell-down of previously non-tradable shares, and encouraging state firms to increase their shareholdings.

'This announcement is a natural extension of the policy to remove tax payments on interest income from bank deposits,' Jing Ulrich, the chairman of China equities at JP Morgan Chase, was quoted by Bloomberg as saying. 'We expect this to have a mildly positive effect on the market.'

Gao Zhanjun, an executive manager of Citic Securities, agreed.

'Any policy that saves investors some money could be good for the market in the long term, but it's really hard to say how big a role this one can play because, frankly, the market is chilly at the moment and I don't think any policy can effectively turn it around,' Mr Gao said.

'When global financial markets are falling, it's hard for any specific market to stay positive, no matter what governments hope and do.'

He said the mainland still had plenty of methods available to stimulate the market, such as further cutting of interest rates and banks' required reserve ratios, loosening loan limits and lowering taxes.

However, he said it was hard to say if any of these new initiatives could immediately drive up the market.

Zhao Xijun, an economics professor at Beijing's Renmin University, said the new policy would not save investors much money given that the targeted tax was not that high before the change.

'But it could definitely help boost investor confidence a bit at this time of big uncertainties,' Professor Zhao said.

'Any positive news might be good for this battered market.'

Slight boost

Analysts see tax removal being of only limited benefit to stock investors

Percentage of withholding tax on interest earnings held in securities accounts that will also end: 5%