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China's Government Plans Major Changes in Policy - What to Watch

China's Government Plans Major Changes in Policy - What to Watch

Renee Mu, Currency Analyst

- China is ready to make the biggest reform in personal income tax in 35 years.

- A new real estate tax will be adopted to ease the tight budget of Chinese local governments.

- SAFE published the QFIIs Guide to further loose restrictions on foreign investment.

China is preparing to make major changes to fiscal policy, and the effects on its economy and markets could be significant. Here’s what we’re watching.

Hexun News

(Chinese leading online media of financial news)

- The reform of personal income tax in China has made significant progress. The Treasury Department has completed the draft ofthe new personal income tax system. It is ready for review by National People’s Congress (NPC) in early 2016. China’s current income tax is charged by the source of income. There are eleven categories for source of income, each with a unique tax rate. Under the new tax system, a mixed method will be introduced to calculate the income tax by combing both lump sum tax and category tax. The taxable income will first be divided into different categories based on the source of income. After deductions applied to each category separately, the amount left will be sum up and charged by a progressive income tax rate.

China has been using the current income tax system since it was adopted in 1980. Despite of revisions across the years, the system has fallen far behind the development of China’s economy and cannot meet the social structure changes. As a result, China now is taking the biggest reform in tax system in 35 years.

For foreign traders and investors, there are both direct and indirect impacts. The direct impact is that capital gains such as from stock dividends will be no longer put into a separate category but into an income pool combined with other source of incomes before applied a tax rate.

The indirect impact, yet more significant, is that the change of tax system will affect the consumption structure of Chinese households. As China is transiting from export-driven to consumption-driven, the economy is more sensitive to any factor that may affect the domestic consumption. For example, if education and health care expenses are included as deductions, Chinese households may have incentive to spend more. Currently, China has a high household saving rate, mainly to cover expenses on children’s college education and post-retirement health care.

- The NPC Budgeting Committee released more details of the new plan for real estate tax. In the new regime, the real estate tax will no longer be collected by the central government; instead, it will become a major source to local governments’ revenue.

The revenue distribution between Chinese central government and local governments are not even. A lot times, local governments lack enough sources of income and then go into bad ideas such issuing low quality local government debts to get funds, which hurts the local economy in the long run. As a result, introducing the real estate tax gives local governments a legitimate way to increase revenue. This part of revenue used to collect by the central government under a different category so the new tax plan is more a revenue transfer than introducing real new tax which the latter would put pressure on the real estate sector.

- SAFE published The Guide for Quota Management of QFIIs in order to loosen controls on QFII quota transfers between different products. Currently there are two types of QFII products: open-end fundproducts and other products. The quota for the open-end funds category is now allowed to share among multiple open-end funds without investor filing an application. For quota transfer between open-end funds and other products, QFIIs institutions should submit an application to SAFE for approval.

QFII is a program from the PBOC which allows “Qualified Foreign Institutional Investors” to purchase securities using non-yuan currencies within mainland China. The scheme was first launched in 2002. In doing so, it provides a channel for foreign institutional investors to participate in China’s domestic markets. For more information about QFII, read Can a Trader Take Advantage of the IMF’s Chinese Yuan Decision.The new published Guide shows that the Chinese regulators keep on facilitating the foreign investment in China by loosening restrictions.

Written by Renee Mu, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.