China has temporarily halved income tax on dividends earned by individual investors, the Ministry of Finance announced yesterday, in a joint effort with other government departments to add life to the stock market.

The benchmark Shanghai Composite Index opened 2.32 points lower yesterday than the previous close on Friday, dipping 2 more percent in the morning.

The shares rebounded after the tax reduction news was announced just before the noon trading close, and finally ended 0.18 percent down.

The ministry also unveiled moves to temporarily suspend levying corporate or personal income tax or stamp duties on compensation by non-tradable shareholders to tradable shareholders.

China is now engaging in share structure reform to float non-tradable shares. As a result of the planned economy, two thirds of China's shares are in the hands of state or legal bodies and are not negotiable.

These non-tradable shares are immune to market fluctuations, while the small tradable shareholders have to shoulder all the market risks.

Non-tradable shareholders have to make compensation of some shares or money to tradable shareholders when listed firms engage in non-tradable shares sales.

On Friday, the reform proposal by computer service provider Tsinghua Tongfang Corporation ailed at the general shareholders' meeting for not matching the required two thirds of tradable shareholders' votes.

The proposal of machinery manufacturer Sany Heavy Industries Co Ltd was passed. More listed firms will be selected to take the share structure reform very soon.

The tax adjustment will help push forward the reform by looking after the interests of the public shareholders, said Jiang Wen, a veteran trader in Beijing.

Small investors will be encouraged to support the experiment when their interests are secured, he said.

The original income tax rate on dividends is 20 percent and about 2.6 billion yuan (US$314 million) in taxes will be saved for the public investors.

The tax cut came on the heels of a series of moves unveiled by other regulators.

At the weekend, the China Securities Regulatory Commission issued a draft circular allowing the original non-tradable shareholders to buy tradable shares two months after all the listed firm's shares are floated.

"This is to avoid irrational price fluctuations, take care of investors' interests and maintain the listed firms' image," said the circular, which is now under discussion.

Although the non-tradable shareholders of the first four pilot firms promised not to sell their shares within a certain period of time, market uncertainties might lead to small investors dumping theirs. The price might then slump sharply even under its real value, according to Dong Chen, a senior analyst from China Securities.

Allowing the controlling shareholders to buy stocks from the market will help secure the real value of the company's shares and keep a stable market, he said.

When put into effect, this move will encourage the big State-owned enterprises (SOEs) to take part in the non-tradable share sale reform.

Many big SOEs are reluctant to undertake the reform, afraid of the market valve vaporizing due to irrational price fluctuations when all shares are floated. The move will offer the big shareholders an opportunity to stem the irrational market changes, he said.

When the share price is below its real value, the original non-tradable shareholders can buy back the shares and prevent the price from dipping lower, he explained.

But the relevent legal terms and regulations should be carried out to avoid speculation, said Xue Jirui, an analyst at CITIC Securities.

(China Daily June 14, 2005)