The top legislature on Friday authorized the State Council to suspend or cut 20-percent tax on interest earned on personal savings under certain economic and social situations.

 

Lawmakers also gave the go-ahead for the Ministry of Finance to issue 1.55 trillion yuan (US$202 billion) of special treasury bonds to finance the purchase of foreign exchange reserves for the yet-to-be-established State Forex Investment Company.

 

The 28th session of the Standing Committee of the National People's Congress (NPC) also rectified the long-awaited Labor Contract Law to improve the protection of employees' legal rights.

 

Experts said the bill on the interest tax aims to make bank savings more attractive and reduce the amount of money flowing into the stock market.

 

Chinese shares took another tumble on Friday as investors panicked at government measures to rein in excess liquidity. The benchmark Shanghai Composite Index fell 2.4 percent to 3,820.70.

 

Jun Ma, chief China economist at Deutsche Bank, said cutting the tax would send a signal to domestic equity investors that the government would continue to act to prevent the market from overheating.

 

"The impact on the stock market was more on a psychological side than a real one," She Minhua, an analyst with CITIC China Securities, said.

 

"The lawmakers gave the government a very flexible span to decide whether they should totally cut the tax on interest income or make an adjustment. It is the fear of uncertain future government moves that hurt the market's confidence."

 

There is also a widespread concern that issue of the 1.55 trillion yuan special bond will suck the liquidity and draw money from the stock market. But analysts said that it depended on how the new bond sales were conducted.

 

(China Daily June 30, 2007)