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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.

Related links
Shanghai surges on stamp duty cut - FT.com
Beijing reaps rewards of shares tax - FT.com

This entry was posted by Helen Thomas on Thursday, April 24th, 2008 at 8:33 and is filed under Capital markets. Tagged with . You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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Comments

  1. Apr 24   15:39 Posted by t2k [report]

    P Caritato: Well one issue could be that > 40% of WW OTC derivs are traded in London so UK Gov, not EU govs would snaffle the cash. I agree with you that the players are addicted to derivs and a small haircut will have little effect on volume. My view is that this could be a great negotiating lever for UK to join Eurozone at an advantageous rate, but I’m probably whistling in the wind while most are focussed on short term survival, propping up the old failed tax structures like Mr Brown’s 10p rate issues. Rome burns …. C’est la vie.

  2. Apr 24   15:26 Posted by P Caritato [report]

    t2k’s remark is a reminder of the “Tobin tax” proposal, which various NGOs rephrase in various forms. Would a 0.1% “hairtrim” ever be noticed by the markets, among the hubbub they churn up? Why aren’t institutional minds like the IMF or the World Bank lobbying to establish it?

  3. Apr 24   14:20 Posted by Helen Thomas [report]

    Sorry P Caritato - good point.
    Stamp duty from 0.1 to 0.3 per cent last May - now back at 0.1 per cent again.

  4. Apr 24   13:26 Posted by t2k [report]

    China is much smarter than the rest of us at understanding where to collect taxes painlessly. Imagine a .3% tax (stamp duty) on estimated $500 trillion (notional value) derivatives turnover each year which shows no sign of slowing despite rumours of such activities going “out of fashion”. CDS contracts, for example, on exchanges would be easy and cheap to collect and much needed transparency enhanced.

  5. Apr 24   13:17 Posted by P Caritato [report]

    Please help me to follow the plot: stamp duty was originally X% (of transaction value, I suppose?) and was tripled to 3X. Was X originally 0.1 percent? If not, what?

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