naked capitalism

I am late to this story, which ran Thursday in the Financial Times, but is sufficiently important as to merit comment (and my quick search of the usual suspect blogs showed it went unreported there too). The Chinese temporarily suspended tax collection on mutual funds to bolster share prices.

China’s stock market, which has been white hot until recently, now posed a major problem for the authorities, Until recently, they had wanted to cool off its meteoric trajectory, but now having gotten what they wanted (the market is off 40%, bringing it merely to the level of last October), they are concerned about further deterioration.

The reason this is of such concern is that Chinese banks pay less than 1% interest to retail customers when inflation is over 7%. That pretty much guarantees that cash will seek out better havens, and the stock market has proven to be a popular destination. Thus, too much of a fall would wipe out savings (as opposed to mere paper gains) and has the potential to create social dislocation.

So much for the idea that China is ready for a market economy.

From the Financial Times:

Beijing has temporarily suspended the collection of corporate taxes from Chinese mutual funds in an attempt to boost the country’s slumping stock prices.

China’s finance ministry and State Administration of Taxation announced the exemption in a brief statement carried by state media last night but did not say how long the measure would last.

The exemption applies to all income from investment funds from securities markets – including stock and bond trading, and interest or dividends from stock or bond investments – according to state news agency Xinhua.

The exemption also applies to investors who receive income from such funds, the notice said.

The move is aimed at shoring up a market that has dropped almost 40 per cent since the historic peak it reached in October and contrasts with the situation a year ago, when officials were casting around for a way to slow a raging bull market.

The government raised the stamp duty on all stock trading in May in an attempt to damp its meteoric rise.

The market fell more than 15 per cent in the days following the announcement but soon rebounded and ended the year up nearly 100 per cent.

Mutual funds make up the most significant group of institutional investors in China, with more than 350 funds controlling more than $450bn in assets…..

The corporate tax rate in China can be as high as 33 per cent although there are exemptions and the government has recently lowered the rate for most domestic companies.