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BEIJING : China may scrap or lower the 20-percent tax on bank deposit savings, official media reported Wednesday, in a move seen as another effort to slow the influx of money into the booming stock market.
A draft bill outlining the plan was submitted to the standing committee of China's parliament on Wednesday, Xinhua news agency said in a brief dispatch.
Xinhua said suspending or reducing the interest tax -- introduced in 1999 -- would help to make savings deposits more attractive, amid concerns that rising inflation means investors were basically losing money by parking it in banks.
China's inflation rate jumped to 3.4 percent in May, topping the benchmark one-year bank deposit rate of 3.06 percent.
"After a number of voices were raised in recent weeks calling for higher returns on personal bank savings, the top legislature has now decided to look into the matter," Xinhua said.
Central bank assistant governor Yi Gang also said the low returns on bank savings was a concern.
"We will take efforts to make it (the real interest rate) generally stay positive," he said in Wednesday's edition of the official China Securities Journal.
The poor returns on bank savings has been one of the reasons for the spectacular climb in China's stock market as small savers have put their money into stocks in hope of a better return.
Share prices in China have risen over 45 percent this year after surging 130 percent in 2006, raising fears of a potential bubble.
The central bank said last week that shares and funds had replaced banks as the top investment option for people living in China's cities.
A record 40.2 percent of respondents in a three-monthly survey conducted by the bank ticked buying stocks and funds as the most lucrative way for investment, up 9.9 percentage points from the first quarter.
Meanwhile investors who most favoured bank savings dropped four percentage points from the first quarter to a six-year low of 26.3 percent.
Hong Kong-based HSBC economist Qu Hongbin said ending the tax on banking deposit savings would offer a meaningful incentive for investors to keep some of their money in banks.
"For average Chinese households, it is equivalent to raising the deposit interest rate by 0.6 percentage points," Qu said.
But Citigroup economist Huang Yiping said that if the stock market continued to rise sharply, most people would still prefer to invest in shares rather than leave their money in the banks, even if they paid less or no tax on their deposit savings.
In this light, Huang described the potential tax move more of an "important policy signal" about cooling the stock market rather than a practical measure.
Huang and other analysts said it was highly likely that the suspension or cut in the tax on deposit savings would occur, although they did not know when.
"It's not clear when the new rule will take effect as the policy makers will have to carefully choose an appropriate timing for it," said Zhang Yongjun, a researcher at the State Information Centre, a government think tank.
The China Securities Business Journal said the rate could initially be cut from 20 percent to 10 percent, then scrapped altogether if inflation continued to rise.
The flagging of the tax move had little impact on China's stock markets on Wednesday, with share prices rising 2.65 percent.
- AFP
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