Measure to encourage long-term investment and reduce speculation

Chinese stock investors and analysts are pinning their hopes on the further reform of the securities sector to end a long-running bear market which has cut trading volumes and weakened investor confidence.

Experts said they were encouraged by the introduction of new dividend tax rates, which they hope may help the market regain some stability.

But one former chairman of the China Securities Regulatory Commission told China Daily that the continued falling market was "irrational" given the "still rapidly growing economy".

Zhou Zhengqing, who served as chairman of the commission for three years to 2000, said: "Effective measures, in terms of economic, administrative and legal policies should be taken to stabilize the stock market."

At Friday's close, the benchmark Shanghai Composite Index retreated 0.8 percent to 2,014.73, hitting its lowest close since Sept 26.

The index has dropped 9 percent since the start of the year, after shedding 22 percent in 2011. It fell 2.6 percent this week — the biggest fall among Asian markets — adding to a 2.3 percent fall last week.

In a move aimed squarely at encouraging individual investors to take a long-term approach to their stock market planning, the Ministry of Finance had earlier announced it will apply a sliding scale to taxes on stock dividends for individuals from Jan 1, 2013.

For individuals who hold shares for at least a year, the dividend tax will be halved to 5 percent from Jan 1. The rate will be doubled to 20 percent for those who hold shares for one month or less, the ministry said.

For investors who keep equities between a month and a year, the tax will remain unchanged at 10 percent of the dividend.

"The longer investors hold shares, the lower their tax burden is," it said in a statement.

"This will encourage long-term investment strategies and suppress short-term speculation."

Liu Xinhua, vice-chairman of the commission, said that more detailed regulations about the tax adjustment would be released soon.

He Qiang, head of the Securities and Futures Institute of the Central University of Finance and Economics, said the differentiated tax rates might help curb short-term speculation and stabilize the market, although the effects may be limited.

"The market also needs more capital to drive up large-cap shares and support growth," He added.

After China's economy suffered its most serious slowdown in a decade, with a seven-quarter straight decline in the growth rate, investors are still worried about the earnings outlook for the country's larger domestic companies, especially the State-owned ones, which have been decreasing fast.

In the first 10 months, State-owned enterprises' profits dropped 8.3 percent from a year earlier, the Ministry of Finance said on Thursday.

The gloomy economic environment may still hold back investor enthusiasm in the stock market until the first quarter of next year, putting pressure on securities regulators to introduce more stimulus measures to restore some investor interest in falling domestic equities, analysts said.