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Market plunges on fear of tax reduction in China

Speculation that the government will reduce or remove the tax on interest income on June 25, 2007 caused the stock market to plummet 3.68 percent.

The 28th session of the Standing Committee of the National People's Congress (NPC), which has been in meetings since Sunday and is scheduled to soon decide on a series of acts, may vote on a proposal authorizing the State Council to adjust or remove the tax on interest income, which could prompt investors to stockpile their money in bank savings accounts rather than buy stocks.

The vote is likely to take place on Friday, the last day of meetings, according to sources close to the NPC and the central government.

"If the government is authorized, I believe it may cut the tax on interest income to 10 percent from the original 20 percent," said Li Zhikun, an analyst with China Jianyin Investment Securities Co Ltd. Li added that the central bank might also hike the interest rate on lending by 18 basis points at the same time.

"The market rumor saying that the central government will increase the interest rate on depositing by as much as 54 basis points is baseless," Li said. "I believe to cut or adjust the tax on interest income is a foreseeable near-term measure instead."

According to Li, cancelling the tax will be equal to a 76.5 basis point hike to the interest rate.

The main stock index has dropped 290 points since Friday, when news started to spread.

The Shanghai Composite Index closed at 3,941.081 points yesterday, its first drop below 4,000 points since June 12, after sinking as much as 4.38 percent at one point in the day. On Friday, it tumbled 3.29 percent.

Statistics from China Depository and Clearing Co Ltd showed the number of new A-share investment accounts being opened daily slipped to a two-month low of 160,104 on Thursday, suggesting the amount of new money pouring into stocks from individual investors might decrease.

Turnover of Shanghai A shares dropped to 139.2 billion yuan - the smallest since early April - from Friday's 165.5 billion yuan, as investors pull out of the market.

 Source : China Daily  Editor:
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