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Interest tax slash won't impact stock market seriously

By Shangguan Zhoudong (Chinadaily.com.cn)
Updated: 2007-06-28 13:53

China's top legislature yesterday began discussing a draft bill that would suspend or cut the longstanding tax on interest earned on personal savings, but experts said the interest tax slash won't impact the stock market seriously, the China Economic Times reported today.

"The role of canceling or reducing interest tax in increasing banks' deposit is limited," said Zhao Xijun, finance professor with the Renmin University of China.

"The outflow of deposits to the stock market is due to (the fact that) investors expect a higher return from the more attractive stock market," Zhao said.

The interest tax slash won't immediately change the money outflow, and in the meantime, if China's inflation keeps at 3 percent growth within this year, the role of the slash will be limited to stop capital inflowing to the stock market, according to Lin Chaohui, an analyst at Guotai Junan Securities.

"Even if the interest tax was cancelled, when the rising inflation is taken into account, the true rate will still maintain in negative territory," Zhao said.

Special coverage:
Markets Watch

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

If the real interest rate remains negative for a long time, it will not be good for the economy, said assistant central bank governor Yi Gang during the weekend.

According to Zhao, with the improvement of China's economic structure, institutions and residents will pay more attention to investment products with higher yields, such as securities.

"Due to Chinese residents are able to bear risks and willing to invest money for higher returns, so the bull stock market is their first choice of course," said Huang Changzhong, a researcher with China Securities Research Co Ltd.

"It's difficult to stop the deposit flowing to the stock market by only canceling or halving the current interest tax," Huang added.

"Compared with the interest rate hike, the interest tax slash will have a very limited negative impact on listed companies, because they won't suffer from the unchanged interest rate as the credit costs are still unchanged," Huang said.
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