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Banking business tax cut not long-term solution

By Xu Shenglan (chinadaily.com.cn)
Updated: 2008-12-09 16:14

Experts said that banking regulators may help banks secure profits by cutting their business taxes, Guangzhou Daily reported today.

It was reported earlier that policymakers may cut business taxes for commercial banks by 2 percentage points from the current 5 percent, which would help those banks enrich their capital flows.

A report released by Citibank predicts that a 2-percentage point cut in business tax would lead to six percent surge in average payoffs in China's banking industry next year.

"The tax cuts will help banks deal with bad loans and resist risks amid the economic downturn," said Wu Yonggang, a financial analyst at Guotai Junan Securities. "Also, this is a signal that the government cares about banks' performances and wouldn't easily transfer their profits to other industry sectors."

The business tax cut is at the same end as the nominal income tax reduction, said Wen Chunling, an analyst at Fitch Ratings. Both of them aim to improve banks' profit levels. From the beginning of this year, Chinese banks' nominal income tax rate was lowered to 25 percent from 33 percent.

However, experts still believed that a mere tax cut won't necessarily lead to better banks' performances. Wen said Chinese banks will still face difficulties next year in making profits, when the central bank may further loosen its monetary policy next year and narrow the interest rate gap between deposits and loans to increase liquidity.

Moreover, the yield ratio of fixed-income portfolio such as treasury bonds is also expected to decline along with a potential interest rate cut, which will put more pressure on banks for profits.

Wang Zhaowen, spokesman for Bank of China, said he hasn't received any news on a business tax cut.