China lifts rates, cuts tax on savings

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Mure Dickie , FT Syndication Service
BEIJING: China has responded to a surprise acceleration in growth during the second quarter and a jump in inflation by announcing it would slash its tax on bank deposit interest income and raise interest rates.
The moves had been widely expected after Beijing last Thursday unveiled second-quarter growth in gross domestic product of 11.9 per cent and said consumer price inflation had hit 4.4 per cent in June, its highest rate in nearly three years.
The quarterly data has fuelled concerns China might be at risk of overheating, although policymakers so far appear to be relatively relaxed about the economy's prospects.
Some analysts had forecast the authorities would scrap altogether the 20 per cent tax on interest income paid by bank depositors. Instead, however, in a terse announcement issued through state media, the State Council, or cabinet, said it would cut the rate to 5.0 per cent from August 15.
In a co-ordinated move, the People's Bank of China raised benchmark one-year deposit and lending rates by 0.27 percentage points with effect from Saturday, the fifth such rise decreed since April last year.
The rate rise would "help to adjust and stabilise inflation expectations", the central bank said in a statement.
By cutting the tax on bank interest income, the government is narrowing the gap between savers' returns and inflation without hurting profits at China's still fragile banks.
Beijing's growing fiscal income means it can afford to reduce a tax that was introduced in 1999 as part of efforts to reduce individual savings and promote consumption.
The tax cut - combined with a 0.27 percentage point rise in the one-year benchmark deposit rate that brings it to 3.33 per cent - should help to keep some funds out of a local stock market that some analysts say is still highly over-valued.
However, widespread expectations of the moves did not stop investors pushing the main Shanghai index up 3.7 per cent last Friday.
Investors appear to be taking their cue from the lack of signs that policymakers are planning more aggressive administrative action to cool growth.
The National Bureau of Statistics argued this week that the pace of recent GDP growth reflected strong consumer and external demand and that non-food prices were still stable.
With temporary supply problems blamed for much of the recent surge in prices for meat, poultry and eggs, some analysts say a sanguine official attitude is justified.
"With the exception of the official GDP figure itself, we can't find a single alternative data point in the economy that suggests egregious overheating, and most point to a stable or even slowing economy," wrote Jonathan Anderson, economist at UBS in Hong Kong, in a research note last Friday.
"As a result, we're not expecting a draconian policy response," Mr Anderson wrote.