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Investing in China: A new capital gains tax?

Posted May 14, 2008

“Will China implement a long-rumored capital gains tax, and risk (another) major sell-off as a result? Only Beijing’s inner circle knows for sure, and that only stokes investor speculation.” — Keith Fitz-Gerald

Blogger’s note: Keith Fitz-Gerald has been leading an investment tour through China. And he’s sending his firsthand impressions about the country’s investment opportunities, its future economic performance and its current stability to his Money Morning readers. This is the fifth in his series of articles. You can find articles one through four in the Money Morning archives under the title The View from China or read on below.

by Keith Fitz-Gerald

Baltimore and Hong Kong – (TFN): The question came to me as I was standing on the floor of the Hong Kong Stock Exchange (HKSE) here. I’d be willing to wager that quite a few investors - both within China and back in the United States - are wondering about this, as well.

Here it is: Will China implement a long-rumored capital gains tax, and risk (another) major sell-off as a result?

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Only Beijing’s inner circle knows for sure, and that only stokes investor speculation. The uncertainty can lead to rampant, knee-jerk sell-offs each time the scuttlebutt of an “imminent” tax surfaces. And those rumors have been surfacing over and over again - since 1994. That’s the year that Beijing’s Ministry of Finance pronounced that income derived from stock trading was exempt from personal income taxation.

That means that billions of dollars have changed hands - tax-free - as far as Beijing is concerned. For westerners accustomed to normal taxation and mature financial markets, this is almost incomprehensible. Yet, for the Chinese government it makes sense. Not only does this tax-free status encourage active market participation from Chinese consumers who otherwise would almost certainly not bother, but it also attracts foreign assets to the market like a porch light attracts moths on a hot summer night.

This foreign capital has had two beneficial effects. Read on to learn more.

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Posted by Keith Fitz-Gerald · Filed Under International Investing 

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