China tries to put brakes on demand for shares

Chinese regulators are considering suspending or abolishing a 20 per cent tax on bank savings, in a move which they hope will stop people moving their cash out of bank deposits into the increasingly heady world of stock investment.

Rising inflation is badly eroding the value of savings in China, where people tend to save as much as 40 per cent of their income in the absence of a good social welfare system.

Buying shares has replaced putting your money in a bank account as the most popular investment option in China - the country's stock market rose 130 per cent in 2006 and already by over 50 per cent this year, despite some vertigo-inducing corrections that have caused ripples around the world.

China has seen the introduction of record numbers of new share-trading accounts which now add up to over 100 million. A central bank survey last month showed that consumers now prefer shares to deposit accounts.

The regulators hope that changing the tax, first introduced in 1999, would make saving in banks more attractive.

The move into share ownership has been driven by ordinary investors, such as former state-owned enterprise (SOE) employees, students and fledgling business people in the booming new China.

Rather than leave their money in savings accounts, and unable to invest in a heavily regulated property market, they are using the cash to buy shares in the hope of receiving better returns, prompting fears of an overheating share market.

These investors are unhappy with the returns they are getting on their bank deposits, because rising inflation has brought real deposit rates close to zero. Rising food prices in China have seen consumer prices creep up to 3.4 per cent in May. The benchmark one-year deposit rate is now 3.06 per cent, just slightly higher than the 2.9 per cent rise in the consumer price index in the first five months of this year.

"What's really happened is a shift out of long-term savings deposits in favour of more liquid short-term deposits," said Jonathan Anderson, chief Asia economist at UBS in Hong Kong.

"The domestic stock market has been booming, with a sharp rally in March and April; as this happened, households and firms liquidated longer-term deposits in order to buy equities. And this is nothing more than the run-of-the-mill, plain-as-pants shift out of quasi-money and into M1 (liquid deposits plus cash) that we see in every economy with buoyant asset markets," said Mr Anderson.

Finance Minister Jin Renqing said the tax had done much to encourage investment and regulate personal incomes - the tax generated 215 billion yuan (€21 billion) in revenues by the end of last year - but he acknowledged that interest income had been hit by rising inflation.

A Bill to change the law was submitted to the ongoing 28th session of the Standing Committee of the National People's Congress, or the top legislature, for deliberation.