China could repeal a 20 percent tax on interest earned from savings deposits if it wants to stimulate consumer spending, the Asian Development Bank said yesterday.

 

Peng Longyun, a senior economist with the bank's resident mission in China, said this would make the economy less dependent on investment and exports.

 

Cancelling the tax would mean consumers, especially those with medium and low incomes, would have more money in their pockets, he said.

 

"This will help them increase spending because these people have the highest inclination to spend," he said.

 

Li Chao, spokesman for the People's Bank of China, the central bank, said earlier this week that the government was conducting a study into the possibility of repealing the tax.

 

He could not say when a decision would be made.

 

China began to levy the tax in 1999 in a bid to force China's huge amount of personal savings out of banks.

 

It came after eight successive interest rate cuts from 1996.

 

"The move failed to meet its original goal of stimulating investments and consumption," Peng said.

 

A lack of investment channels has seriously curbed the use of private money. The tax also failed to effectively stimulate consumer spending.

 

A poorly-funded social security system has forced most Chinese to deposit their money in banks in a bid to save up for major future expenditure in areas such as housing, medical treatment and education.

 

Peng said the tax on interest had led to a cut in people's incomes.

 

For most people, especially the unemployed and rural residents, interest has become an important source of income.

 

"The tax on interest has actually reduced the purchasing power of most Chinese people," he said.

 

An expert from the Taxation Research Institute under the State Administration of Taxation agreed with Peng, adding the tax did not help the country's present macro-economic situation.

 

"The 20 percent tax rate on interest earnings reduces the purchasing power of medium and low-income residents who already suffer from low interest rates," he said.

 

China's benchmark interest rate on one-year deposits stands at 2.25 percent after the interest rate hike in 2004 - the first time in nearly a decade the figure had been raised.

 

Meanwhile, the country's consumer price index, policy-makers' key inflation measurement, rose year-on-year by 1.4 percent during the first two months of this year.

 

"The government should beef up coordination between its monetary policy and fiscal policy in a move to establish a market-oriented economy," the analyst said.

 

He added that cancelling the tax was both possible and necessary, as the government is trying to reduce the high savings rate, which currently stands at about 46 per cent of gross domestic product.

 

The government has already announced that it will take measures, such as accelerating reforms of the social security and education systems to reduce household savings and stimulate consumer spending.

 

(China Daily April 7, 2006)