CHINA IS INTRODUCING dividend tax breaks for long-term stock market investors as part of a raft of measures designed to ease the volatility that has rocked the country's main stock exchanges since the middle of this year. The dividend tax breaks were announced jointly by the ministry of finance, the tax authorities and the securities regulator.
Previously there was a flat dividend tax rate of 5%. Now the market regulators are using a carrot-and-stick approach to reward long-term investors with dividend tax breaks and to punish short-term investors with higher dividend tax rates. With effect from 8 September, the dividend tax regulations have been modified as follows:
- 20% dividend tax rate on stocks held for one month or less;
- 10% dividend tax rate on stocks held for between one month and one year;
- 0% dividend tax rate on stocks held for over one year.
The Shanghai Composite has slid by some 40% wiping US$5 trillion off the value of its stocks since it peaked in mid-June.
The China Securities Regulatory Commission (CSRC) has also announced plans within the last few days to introduce other measures to ease volatility on the country's stock exchanges, centred around establishing a circuit-breaker mechanism to temporarily stop trading to avert panic selling if the stock index falls beyond a target percentage.
The CSRC is particularly concerned about controlling automated program trading, curbing excess speculative futures trading and better regulating margin calls that allow investors to borrow money to trade stocks, thereby increasing overall leverage. China Securities Finance Co (CSFC), the state-owned margin lender, will continue to stabilize the market via various measures when it takes the view that sharp market volatility is likely to trigger systemic risks.
Regulators reckon that risk in the A-share market has already been reduced somewhat as average valuations on the Shanghai Composite Index have dropped substantially from 25 times to below 16 times while valuations on Shenzhen's ChiNext have declined by around 50% from 134 times to 63 times.
The outstanding value of margin finance has also dropped dramatically from a previous peak of Rmb2.3 trillion (some US$370 billion) to around Rmb1 trillion, indicating a massive deleveraging of risky margin calls, according to regulators.