China mulls over differential stock dividends tax

Security authorities in China are studying policies to reduce taxes on stock dividends for long-term investors in a latest move to boost the country's depressed capital market.

The policy will impose different tax rates on dividends distributed by listed companies to individual investors in accordance with investors' shareholding period, Shanghai Securities News reported on Monday.

The holding period will be divided into three phases -- less than one month, one month to a year, and more than one year, according to the policy.

Investors holding shares for less than a month will have to pay the legal rate, while those owning shares for more than a year will enjoy a favorable rate.

The move comes seven years after the government collected half of the legal tax rate on stock dividends for individual investors in 2005.

The policy, which marks the fourth such cut this year, will help curb excessive speculation, boost value investment, and highlight blue-chip stocks which usually pay high dividends to their investors, the report quoted analysts as saying.

"It will guide investors to make long-term investment in blue chip stocks which are currently undervalued," said Dong Dengxin, a financial and securities researcher at Wuhan University of Science and Technology.

The benchmark Shanghai composite index has slumped over 15 percent since May as worries over the domestic economic slowdown and eurozone debt crisis have dampened investor confidence.

In sharp contrast, heavy speculation has led to unusually-high valuation for small-cap stocks. Price-earnings ratio for special treatment shares, or companies that have posted two straight years of losses, has reached as much as 60 times, compared to less than 11 times for the Hushen 300 companies, which account for 60 percent of the country's total stock market value, the report said.

Shang Jian, general manager of the Shenzhen-based UBS SDIC, a fund management company, said in the report that the proportion of A shares' total market value in the country's gross domestic product has dropped under 50 percent, meaning that they are significantly undervalued.

To rally the market, the government introduced a raft of measures earlier in the year, including lowering brokerage and transaction fees.

With all the favorable polices, the blue chip stocks are likely to soon regain their value, Shang said, saying that they have already started to win attention from foreign institutional investors such as qualified foreign institutional investors.

According to the report, dividend yield for the Hushen 300 companies reached 2.34 percent in 2011, higher than the 2.12 percent for S&P 500. Yields for market heavyweights such as banks and railway companies have climbed to 5.91 percent, indicating higher investment value.