Interest tax may be cut or suspended soon
By Zhang Ran (China Daily)Updated: 2007-06-28 08:30
Lawmakers yesterday debated a bill authorizing the State Council to cut or suspend tax on interest accrued from bank deposits - a move seen as helping rein in excessive liquidity.
Voting is scheduled for tomorrow and the bill is widely expected to be passed by the Standing Committee of the National People's Congress.
Analysts said cutting the tax would draw money back to banks, and slow investors from pumping their funds into an overheated stock market that has almost doubled this year.
A 20-percent tax on savings deposit interest for all renminbi and foreign currency accounts was launched in 1999 to reduce mounting individual savings and boost domestic consumption.
Household deposits in May fell by 278.4 billion yuan ($36.5 billion) after dropping in April for the first time since February 2003, according to the central bank. Economists predicted that around 4 trillion yuan ($526 billion) will flow from banks to bourses this year.
Chen Xingdong, chief economist of BNP Paribas Peregrine Securities, suggested the government cut the tax to 10 percent, adding the move will have a psychological impact on stock investors.
Frank Gong, chief economist of JP Morgan Securities (Asia Pacific), said that the government should suspend the collection of the tax.
"There is no need to retain the tax, as it has put the real deposit interest rate in negative territory," Gong said.
Currently, the benchmark one-year deposit carries an interest rate of 3.06 percent; but after factoring in the 20 percent 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 in May after rising 3.0 percent in April and 3.3 percent in March.
(For more biz stories, please visit Industry Updates)