China’s tax U-turn | FT Alphaville

China’s tax U-turn

Be careful what you wish for. Only a year after tinkering with tax to try to take the heat out of the soaring Chinese stock market, Beijing is in reverse gear.

The government last May tripled stamp duty on share trading in an effort to cool speculation but has now moved the rate back to 0.1 per cent as the mainland markets have slumped.

Cue market euphoria. The benchmark Shanghai Composite index jumped more than 9.3 per cent on Thursday.

Will it last? Last year’s drop on the tripling of the tax, when the index was hovering around the 4,000 mark, was just a brief hiccough on the ascent to its October peaks.

If the authorities were spurred into action by the index’ drop below 3,000 earlier this week, about half its peak last year, can we deduce that an index level of between 3,000 and 4,000 is Beijing-approved? Could make life interesting, the Shanghai market has zipped between those markers, both on the way up and the way down, in little more than a month.

Either way, Beijing is not afraid of a tax-related U-turn and one that has rather larger figures attached than Gordon Brown’s home-grown variant.

Last year’s stock market frenzy and tax hike meant that the Chinese government collected Rmb 200.5bn in stamp duty on share trading, up from Rmb 17.9bn in 2006. More than 90 per cent of that came in after the May hike.

It’s a very sizable sum for Beijing – amounting to about half the country’s defence budget. Its citizens last year contributed nearly as much to governement coffers through their affection for the stock market, as they did in personal income tax.

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Beijing reaps rewards of shares tax –