Chinese School - Interest tax bill passed; special T-bond issuance approved

BIZCHINA / Center

Interest tax bill passed; special T-bond issuance approved

By Dong Zhixin (chinadaily.com.cn)
Updated: 2007-06-29 16:14

The Standing Committee of the National People's Congress hold a meeting
at the Great Hall of People in Beijing June 29, 2007. [Xinhua]

China's top legislature Friday passed proposals on authorizing the State
Council to reduce or cancel tax on interest accrued from bank deposits
and proposals on a massive sale of special T-bonds.

The Standing Committee of the National People's Congress voted in favor
of an income tax law revision that gave the State Council the power to
adjust the interest tax.

"The imposition, suspension or reduction of interest tax on bank savings,
as well as specific methods thereon, are subject to the decision of the
State Council," said the amended law.

Lawmakers also gave the go-ahead for the Ministry of Finance to issue
1.55 trillion yuan of special treasury bonds to finance the purchase of
foreign exchange reserves for the yet-to-be-established State Forex
Investment Company.

Interest tax

Special coverage:
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Markets Watch
Red Chips Return

Related readings:
Interest tax may be cut or suspended soon
A duo of measures considered to stop deposit outflow
Special bond issuance targets excess liquidity
Hot money inflows to be curbed

Analysts expect the State Council to initially halve the current interest
tax rate to 10 percent. Should inflation continue to grow, then the
cabinet could cancel the tax completely. However, there are also calls
for the abolition of the tax altogether.

The tax adjustment will be the authorities' latest attempt to make the
real interest rate positive and discourage the diversion of bank deposits
to the stock market.

Currently, the benchmark one-year deposits carry an interest rate of 3.06
percent. However, given the 20 percent interest tax, the actual yield is
just 2.45 percent.

That return is well below the inflation rate as measured by the consumer
price index, which hit a two-year high of 3.4 percent after rising 3.0
percent in April and 3.3 percent in March.

If the real interest rate remains negative for a long time, it will do no
good to the economy, said assistant central bank governor Yi Gang last
weekend.

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