China will adjust dividend tax rates to reflect the length of investors' share-holdings starting from the beginning of next year, according to policies recently approved by the State Council.
Specifically, investors who hold their shares for less than one month will have to pay a 20 percent tax on their dividends, while those who keep their stakes for more than one year will enjoy a favorable rate of 5 percent. Those holding shares for between one month and one year will have to pay the existing rate of 10 percent.
According to the country's top financial regulators, this shift is aimed at minimizing the rampant buy-today-sell-tomorrow behavior that has long been roiling the mainland equity market, while also drawing investors' attention toward blue-chips that pay dividends but are generally undervalued.
If these are the goals of the new dividend tax structure though, the regulators and policy makers behind them may soon be in for disappointment.
First of all, dividends account for a small percentage of most investors' earnings from the stock market. Between 2001 and 2011, the cash dividends paid by listed companies on the Chinese mainland only accounted for 25.3 percent of the profits made by stock investors, well below the 40 to 50 percent commonly seen in most overseas markets, according to the China Securities Regulatory Commission. With dividends representing just a fraction of their earnings, a small increase or decrease in dividend taxes will have an almost negligible impact on investors' decisions to buy or sell.
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