To encourage long-term investment in the beleaguered stock market, Beijing unveiled a new dividend tax regime yesterday after the benchmark edged closer to a psychologically significant lower level.
The Ministry of Finance published a new rule after the market close under which investors who hold stocks for more than a year will be subject to a 5 per cent dividend tax, instead of 10 per cent.
Those who hold stocks for one month or less will be charged a 20 per cent dividend tax.
Investors who hold stocks for more than one month but less than a year will be subject to the 10 per cent tax.
The new tax system will become effective on January 1.
"The policy change is aimed at using tax as a tool to direct long-term investments while curbing short-term speculation," the ministry said in a statement. "The goal is to ensure long-term healthy growth of the country's capital market."
The new rule is in line with China Securities Regulatory Commission chairman Guo Shuqing's advocacy of hugely increasing cash dividends to shore up investor confidence.
It is believed that Guo lobbied the State Council to adopt the new tax mechanism. The finance ministry said the council had endorsed the new rule.
The announcement of the new tax system came after the Shanghai Composite Index slipped 0.77 per cent yesterday to close at 2,014.72 points.
Analysts said the indicator would soon crash below the 2,000-point level amid weak buying interest.
"The market is unlikely to hover above the 2,000-point level in the next few trading days," said Shenyin Wanguo Securities analyst Wei Daoke. "The lower turnover this week proved a lack of confidence."
On the Shanghai exchange, weekly turnover fell 19 per cent to 196.5 billion yuan (HK$244.3 billion) on a loss of 2.6 per cent in the index. The index has declined 8.4 per cent this year after the market was mired in bearish sentiment in the past two years.
Despite growing calls by the regulator to invest in blue-chip stocks, investors were shying away from the market because of worries that companies could not generate enough profits for dividend distributions amid a slowdown in economic growth.
"I've already become a long-term investor but still lost more than half of my investments," said Lin Jiaxiang, a retired worker. "A smaller tax payment for dividends will be far from covering my losses."
Beijing cut the dividend tax rate to 10 per cent in 2005 from 20 per cent, hoping to attract fresh capital to bolster the then weak market. But the move failed to pay off as investors remained bearish on the market.
Guo has been striving to buoy the weak market after taking office late last year, cutting the overall size of initial public offerings and urging institutions such as the national pension fund to increase equity holdings, only to see the main index continue its downward trend.
Analysts say the benchmark will hit 1,800 points this year.