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.
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No doubt a slow down in US consumption of Chinese goods will help. LoL.
“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.”
Sounds like the US low intrest rates only savings is in 401ks and IRA’s other then home prices that are now falling. The FED has done a stick save on the market threw intervention and more then likely a quid pro quo with the investment banks to drive commodity prices down in exchange for free money threw the needle exchange program, Remember stocks always go up, at least in rigged markets they do. At least China is open about it.
problem is chinese accounting laws mark to market the equity holdingsof companies. as their stock market rises, the arnings of their firms tend to technically increase; when the stock market falls, these firms start to post losses. investors never really figured that out out when they got caught up in the chinese growth story hype.
I’m worried about what always happens in stock markets when poorly regulated companies and stock promoters meet unsophisticated investors. When will this particular train leave the rails?
Government efforts to stop dropping stock market prices which wipe out savings is not limited to the Chinese — I have this sneaky suspicion the only times people support market capitalism are when asset values are rising — let them fall, and “there is the potential to create social dislocation”, and the need for government intervention. Is this not true of Japan and the U.S. following their bubbles? What Deng Xiaoping famously said about the color of cats cuts both ways — if the cat is putting on weight but the number of mice is increasing, people will not let that “free market” continue.
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