China considers suspension or cutting of interest tax on bank savings

China's legislature on Wednesday began discussing a draft bill that would authorize the State Council to suspend or cut the longstanding tax on interest earned on personal savings, in order to make bank savings more attractive and reduce the amount of money flowing into the stock market.

The draft bill was submitted Wednesday to the ongoing 28th session of the Standing Committee of the National People's Congress (NPC), or the top legislature, for deliberation.

In recent months, China has seen large sums of money flow from deposit accounts into stock trading accounts.

A bull stock market and soaring housing prices had made many people realize that the yield on bank deposits was simply too low, said Huang Fuguang, a finance professor at Tianjin-based Nankai University.

China's household deposits posted the largest monthly drop in May, decreasing 278.4 billion yuan, according to central bank statistics.

China began to tax interest earned on savings accounts in November 1999. The 20-percent tax was levied on all Renminbi and foreign currency savings accounts opened by individuals.

By the end of 2006, the tax had generated 214.6 billion yuan.

"Taxing the interest on savings accounts has encouraged consumption and investment and helped regulate personal incomes," said Jin Renqing, Minister of Finance, on Wednesday to legislators.

In the current economic climate, with the consumer price index rising, revenues from personal bank savings had declined, he acknowledged.

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 three percent in April and 3.3 percent in March.

Jin said that given the speed of economic development, "state finances are able to handle a suspension or reduction of the tax on interest on saving accounts".

China's stock market has risen more than 45 percent this year after climbing 130 percent in 2006.

Despite the discussion of the draft bill which may drain liquidity, China's benchmark Shanghai Composite Index on the Shanghai Stock Exchange closed at 4,078.6 points on Wednesday, up 2.65 percent or 105.23 points from the previous close.

Source: Xinhua