Chinese regulators are considering halving the interest tax and increasing the interest rate again to stop the deposit outflow, insiders said, according to a Guangzhou Daily report.

 

Insiders said that abolishing the interest tax may have a huge impact on the market, so regulators may steer a middle course to halve the interest tax.

 

China's consumer price index (CPI) grew 3.4 percent in May, higher than the 3 percent warning line set by the central bank. In May, China's household deposits plunged by 278 billion yuan (US$36.2 billion), after a 167 billion yuan decline in April, as more and more people invest their money in the stock market.

 

Starting from last year, the central bank has increased the bank reserve requirements eight times, but has had less of an impact on the market.

 

A survey conducted by the Industrial and Commercial Bank of China shows that, 52 percent of investors surveyed say they will buy stocks in the coming six months.

 

If the central bank slashes the interest tax, it can slightly raise the nominal interest rate, the rate of interest before adjustment for inflation. Only raising the interest rate sharply may negatively impact the capital and bond markets, according to Lin Chaohun, a senior researcher with Guotai Junan Securities.

 

The securities company's latest report shows that China still has room to raise the interest rate and there is a possibility for the central bank to raise the one-year deposit interest rate by 0.5 to 1 percentage points.

 

The report also predicted that the interest tax would go down to 5 percent this year.

 

(China Daily June 21, 2007)