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Free Dividends in China: China Cuts Long-Term Investor Dividend Tax Rates to Zero

In a shocking statement on Monday, Beijing announced that it would remove personal income tax on dividends for shareholders holding stocks for more than one year. The announcement comes after a shaky period in the Chinese stock market, which has fallen approximately 40% since its April 2015 highs and is currently down 5% YTD.

Beijing Continues Unprecedented Financial Policy to Calm Fearful Market

Lowering the long-term dividend tax to zero is just one in a series of dramatic fiscal policy moves to help stabilize a deteriorating stock market:

  • June 27, 2015: Surprise interest rate cut by the People’s Bank of China (PBOC) and required reserve ratio cut.
  • July 1, 2015: China Securities Regulatory Commission (CSRC) reduces collateral rules and allows margin loads to be extended.
  • July 3, 2015: Central Hujin, a state-owned investment fund, starts buying index Exchange Traded Funds (ETFs); the futures exchange suspends 19 accounts from short selling; Qualified Foreign Institutional Investor (QFII) quota is raised from $80 billion to $150 billion; CSRC slows the pace of A-share IPOs.
  • July 4, 2015: Brokers commit to a $20 billion stabilization fund; 25 fund managers pledge not to sell shares until the market rallies sharply; 28 companies “voluntarily” suspend IPOs.
  • July 5, 2015: IPO issuance suspended; PBOC provides liquidity to China Securities Finance Corp. (CSFC), a corporation that issues loans to qualified securities firms for margin on-lending to stabilize market.
  • July 7, 2015: CSFC pledges to buy more small-cap stocks.
  • July 8, 2015: SASAC (a state holding company) orders state-owned enterprises (SOEs) not to sell shares; CSFC gives a $45 billion credit line to brokers; the maximum cap on qualified issuers investment in a single stock is raised from 5% to 10% of market cap; 111 state-owned companies commit not to cut holdings.
  • July 9, 2015: CSRC bans officers, directors and listed company shareholders with stakes of 5% or more from selling shares for six months; China Banking Regulatory Commission allows bank roll-over loans backed by shares.
  • July 27, 2015: The CSRC says it is investigating share-dumping incidents of the day and vows to further support the market.
  • July 31, 2015: Regulators announce the restriction of 24 stock trading accounts for “trading irregularities”; regulators widen search for short sellers.
  • August 10, 2015: China begins looking for a replacement of top securities regulator.
  • August 11, 2015: Chinese Central Bank (PBOC) surprises the world by devaluing the yuan by nearly 2%, a move that is followed by further weakening of the currency.
  • August 14, 2015: PBOC surprises the market by announcing that Beijing will allow market forces to play a larger role in determining stock prices.
  • August 18, 2015: Share indexes drop more than 6% due to further yuan depreciation worries and concerns of state-owned funds leaving the market.
  • August 23, 2015: China allows pension funds managed by local governments to invest in the stock market for the first time.
  • August 24, 2015: PBOC cuts interest rates for the second time in two months, ratcheting up their support of a weak market once again.
  • August 26, 2015: Regulators and police are cracking down on suspected violations of stock dealing rules and trading information.
  • August 27, 2015: China announces that the Chinese market decline was caused by U.S. Fed rate hike concerns.
  • September 7, 2015: China announces a zero dividend rate tax for long-term investors.

Impacts on the Global Investment Environment

In recent weeks, the U.S. stock markets have mimicked the performance of Asian markets day-over-day. However, recently that relationship has decayed. Global investors are concerned about China’s ability to prop up their floundering market, and some have began to doubt that China’s financial policies are enough to delay further declines in the market.

The Bottom Line

Lowering dividend taxes to zero for long-term investors is a clear call for additional foreign investment to help stabilize the Chinese financial markets. A dividend tax of zero makes the Chinese stock market the cheapest market for global investors with dividend capture strategies. While there are still concerns about the general price levels in the Chinese stock markets, for a long-term international investor taking advantage of this unprecedented move could be a hay day indeed.

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