Tax cut and bond sale expected to have a short-term effect
Mainland stocks tumbled as investors fretted about the 1.55 trillion yuan special bond sale and a cut in the deposit interest tax, both approved by the country's top legislative body yesterday.
But analysts maintained that while the moves might have some short-term psychological impact, they would not fundamentally hurt the stock market in the long run.
They noted that the bonds initially would be acquired by the central bank, preventing the sale from soaking up liquidity and that the potential tax cut was too minor to deter investors from withdrawing savings for more lucrative share purchases.
The National People's Congress's Standing Committee yesterday approved the Ministry of Finance's plan to issue the special treasury bonds for the purchase of US$200 billion of foreign exchange reserves from the People's Bank of China that would be used to fund the new China Investment Company, according to Xinhua.
The new state fund will use some of the US$1.2 trillion in its foreign reserves to invest overseas, alleviating pressure for faster yuan appreciation while at the same time potentially gaining better returns than it currently gets from its portfolio of mostly low-yielding US treasuries.