The State Administration of Taxation cut the business tax rate for financial and insurance companies by 1 percentage point to 5 percent on January 1 this year.

It marked the third consecutive year that the government had cut the business tax rate for these companies by a percentage point.

Xia Jiechang, a senior economist with the Chinese Academy of Social Sciences, said the business tax cut for these companies should be further cut to no more than 3 per cent in the future because they have borne too heavy a tax burden compared with their counterparts in foreign countries.

The successive cuts in business tax for financial and insurance companies since 2001 were important measures taken by the central government to help companies become stronger, Xia said.

Experts estimated that a cut in the business tax rate by one percentage point could help financial and insurance companies save 6 billion yuan (US$722 million) a year.

Zhang Peisen, a senior expert with the Taxation Research Institute, said: "This will surely help these companies increase their profits as well as their competitiveness."

When China began to implement a new taxation system in 1994, it imposed a rate of 5 percent for business tax on financial and insurance companies and a rate of 55 percent for income tax.

In 1997, it adjusted the business tax rate to 8 percent and the income tax rate to 33 percent.

With the aim of supporting the reform of the financial and insurance industries, the government decided to cut the business tax rate from 8 per cent to 5 percent over three years.

The State-owned commercial banks were the largest beneficiaries of the tax rate cut because their business income accounted for an important part of their total income, Zhang said.

The cut in business tax could help increase their capital adequacy, he said.

The country's Law on Commercial Banks stipulates that commercial banks' capital-adequacy ratio should reach at least 8 percent, the minimum required by the Basel agreement reached by international banking managers.

This means China's commercial banks - especially the big four State-owned banks - will have to achieve the goal before they can be listed on the stock market, said Ding Maozhan, director of the Policy Research Department of Beijing's Chongwen district government.

The People's Bank of China, the central bank, said the big four State-owned banks - the Agricultural Bank of China, Bank of China, China Construction Bank and the Industrial and Commercial Bank of China - will be transformed into large, modern and strongly competitive commercial banks in five years or so.

Some State-owned commercial banks will be restructured to become State-controlled shareholding commercial banks, the central bank said.

With the aim of raising their capital-adequacy ratio, commercial banks will have to reduce the amount of risky assets they hold and increase their profits, Ding said.

(China Daily February 24, 2003)