Whether or not the Chinese government should abolish its tax on bank savings
interest has been a hot topic at the annual National People's Congress for
A 20-percent tax on savings deposit interest for all renminbi and foreign currency accounts opened by individuals
at Chinese banks was introduced in 1999, in a bid to reduce mounting individual
savings at the time.
Seven years on, the central bank said China's
renminbi savings deposits were 15.97 trillion yuan at the end of November last
year, up 15.3 percent on the previous year.
The Chinese "hobby" of saving
shows no sign of abating.
The tax on interest failed to deter people from
squirreling away their money into savings accounts. Nor did it stimulate
consumer spending. Instead, opposition to the tax is getting more vocal every
The macroeconomic environment has drastically changed in the past
seven years, and China's economy has grown out of deflation. The motivations for
the interest tax to reduce bank savings, boost consumption and curb deflation no
longer exist. Therefore, it seems unnecessary to continue the policy.
supporters of the interest tax argue that the total deposits of the wealthy are
far greater than those of the poor, and the affluent pay more tax. They say the
money raised from the tax goes to the public.
It is true that the total
amount of savings held by the wealthy far exceeds that of the poor. But who
relies more on bank savings?
The rich, in fact, invest more money than
they save. Whereas the poor, due to low incomes and limited investment channels,
rely more on bank savings to make a living.
In this respect, the tax
chips away at the savings of middle and low-income families, whereas those with
higher wages are relatively unaffected given they have other channels to raise
Changing China's savings habit would be as difficult as it would
be to change America's spending habit.
Most importantly, China's high
savings rate is attributed to low consumer confidence because of high employment
pressures and costly education, housing and medical care.
and the interest tax, the real interest rate on bank deposits has almost become
negative for individuals.
The interest tax on savings deposits has in
fact become an impediment to the growth of consumer spending.
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