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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 years.

 

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 year.

 

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.

 

But 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 money.

 

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.

 

Given inflation 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.

 

(China Daily March 16, 2007)