The Chinese government is actively considering a bold 50% cut to the stamp duty levied on stock market transactions, according to insider sources, as policymakers seek to breathe new life into the country’s underperforming equity markets.
If approved, the reduction would slash the current 0.1% duty on securities trades in half down to just 0.05% — the first such tax break since 2008. The plan was recently submitted to China’s State Council by the Ministry of Finance after gaining the backing of senior officials, sources revealed.
An announcement on the game-changing policy could come as early as Friday, though the final decision remains up in the air. Nonetheless, the radical proposal demonstrates the resolve of Chinese authorities to reignite stock market activity even at the cost of major tax revenue losses.
China’s benchmarks lag global recovery
The sweeping stamp duty cut aims to boost battered investor sentiment after confidence has waned amid China’s slowing economic growth and ongoing property sector debt woes.
The benchmark CSI 300 index has sunk 11% from an April high, hitting 9-month lows in August. Trading volume has also dried up, with last month seeing the lowest turnover since January 2021.
In contrast, MSCI’s global equity index has surged nearly 11% year-to-date, underscoring the divergence between China’s markets and the worldwide recovery.
Short-term boost expected, but structural issues remain
While the tax incentive may provide a brief jolt of optimism, analysts caution it is unlikely to be a panacea for China’s markets given the myriad structural drags facing the economy.
“Such a policy will probably give a short-term fillip to the market, but won’t have much effect over the long run,” said Shanghai fund manager Xie Chen. “The rebound could last for just two to three days, or even less.”
In Xie’s view, a sustained upside reversal will require signs of strengthening economic fundamentals, not just temporary stimulus measures.
Authorities pledge to revitalize markets
Nonetheless, Beijing has rolled out a flurry of supportive policies in recent weeks to defend stock valuations after the alarming meltdown.
Stabilizing markets is now seen as critical for shoring up fragile business and consumer confidence. In late July, senior officials vowed steps to “reinvigorate” equity trading following the weak Q2 GDP print of just 0.4% year-on-year growth.
Among other efforts, regulators organized an emergency meeting with top Western money managers to soothe market nerves. A surprise cut was also made to a key interest rate benchmark.
Sources said policymakers are intent on engineering a turnaround in sentiment. “Without a relatively stable market environment, there’s no basis for reviving the market and lifting sentiment,” emphasized China Securities Regulatory Commission (CSRC) officials.
Tax break would be unprecedented
Cutting the stock transfer levy by fully 50% would be an unparalleled move. China’s State Council holds authority to adjust stamp duties based on national conditions.
The total fiscal take from the stock trade duty was around 276 billion yuan last year, equivalent to 1.35% of overall revenues.
Past reductions occurred in 2008 and 2019, but the currently proposed magnitude of the cut is exceptionally large. It signals Beijing’s determination to get equity markets moving again despite forgoing huge tax income.
Some analysts skeptical of impact
Certain critics argue that lowering transaction fees alone cannot sustain a meaningful rebound if the economic backdrop remains bleak.
“Cutting stamp duty doesn’t solve the problems that are hampering China’s economic growth,” contended Huang Yan of Shanghai asset manager QiuYang Capital.
But others counter that properly timed tax incentives could help turn around negative psychology — especially if coupled with fiscal stimulus.
Ongoing policy support still needed
While slashing the stock trade levy is impactful, most economists agree Beijing will need a range of supporting measures to achieve an enduring reversal in market sentiment.
China’s stringent zero-COVID controls continue to constrain consumer mobility and business activity. At the same time, authorities have been cautious about overstimulating the heavily-indebted economy.
This has led forecasters like Oxford Economics to downgrade China’s 2022 GDP projection to just 3.3% from 4.1% previously.
To decisively improve confidence, many analysts argue Beijing must relax its fiscal stance and stoke infrastructure investment, while the PBOC provides additional prudent monetary easing.
Ramped up fiscal stimulus on the cards
In particular, significantly ramping up infrastructure project spending could help compensate for weak private investment and create jobs.
While the State Council has approved some new transportation initiatives, economists say this is likely insufficient to hit the full-year growth target. A larger-scale construction drive may be forthcoming.
PBOC also has room for further rate cuts
Likewise, the People’s Bank of China (PBOC) has scope to deliver added rate reductions and liquidity injections to amplify the stock duty cut.
However, China’s senior leadership has remained wary of overstimulating the economy after the debt buildup during COVID. So any easing will probably be gradual.
Tax incentive not a panacea — further efforts needed
In summary, halving China’s equity trade stamp duty will likely produce a fleeting confidence boost rather than act as a silver bullet. The ongoing economic constraints from COVID impacts, the property crunch, external risks, etc. will continue weighing on longer-run sentiment.
For a sustained turnaround, most economists concur China requires pro-growth fiscal stimulus centered around infrastructure, paired with targeted monetary support from the PBOC to unlock lending and credit demand.
While the duty cut is a helpful starting point, considerable further policy assistance will be needed to durably revive both stock markets and growth prospects over the medium term.
Looking ahead, the outlook remains challenging but — with judicious ongoing stabilization measures from Beijing — the country can hopefully nurse markets and momentum back to health.
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