It is learnt that relevant department is studying the policy of imposing differentiated levy of the income tax on dividends received by individual investors in accordance with their shareholding periods. The latest trend has promptly aroused strong concerns from the market. According to senior market insiders, the orientation toward differentiated levy of dividends tax not only reflects the administrators' efforts in rectifying the system characterized by "attaching importance to financing instead of returns" and their determination to further care for the market, but also constitutes an important part of implementing the central authorities' policy on the "structural tax reduction". The move is of significance at the least in avoiding double taxation to protect the interests of small and medium-sized investors, benefiting the development of institutional investors to promote the stability of the market, and encouraging long-term shareholding and value investing to highlight investment values of the blue chips with high dividend rates.
Accumulated Policy Effects to Restore Values of Blue Chips
According to the analysis of Shang Jian, General Manager of UBS SDIC Fund Management Co., Ltd., after the release of the policies such as differentiated levy of dividends tax, the gradually accumulating effects of the policies are expected to make the blue chips embark on the road of value recovery.
"The market capitalization of A shares, accounting for less than 50% of GDP at present, is significantly underestimated, especially in the blue-chip board. Currently, the foreign capital institutions with QFIIs as the representative turn their attention to the blue chips in the depression of valuation, which can be regarded as an important sign for the road of blue chips leading to the value discovery", said Shang. He added that with the release of a series of policies and measures for reducing trading costs, improving market efficiency, and easing investors' burdens, especially the major breakthrough to be made in the policy of imposing the differentiated levy of the income tax on dividends received by individual investors in accordance with shareholding periods, the policy effects are constantly accumulating, gradually changing the system of the A share market featuring financing outweighing returns, with the blue chips expected to lead the trend.
In his opinion, with the effects of making money, blue chips will keep boosting the investors' confidence. As the boards with small and medium-sized market capitalizations, such as the GEM, constantly feel the pressure of industrial capitals' cashing out, the road of blue chips for value recovery is of great significance for revitalizing China's capital market.
Complying with the Spirit of "Structural Tax Reduction" and Showing the Determination to Care for the Market
According to the analysis of Mo Taishan, President of Shanghai Chongyang Investment Management Co., Ltd., and Hu Lifeng, General Manager of China Galaxy Securities' Funds Research Center, from the macroscopic view, the policy orientation toward differentiated levy of dividends tax is an important part in implementing the policy of the "structural tax reduction" put forward by the central authorities, as it will not only help achieve the objective of the policies for benefiting masses and increasing benefits, but also by guiding and adjusting the behaviors of market participants, better promote the infrastructure of the capital market and facilitate the reinforced rationalization of the real economy.
In addition, the vigorous research in the policy shows the determination of the administrators to care for the market, and once released, the policy will achieve multiple effects at one stroke.
"Since assuming the office as Chairman of the China Securities Regulatory Commission (CSRC), Guo Shuqing has implemented a series of measures for encouraging value investing, directing dividend distribution of listed companies, energetically fostering institutional investors, and cutting trading costs, etc., with an aim to constantly consolidate the foundation for the long-term steady development of the market", said Mo in his analysis, "Since the beginning of this year, the regulatory authorities have remarkably reduced transaction fees and supervision fees of the securities and futures markets three times in succession. The policy of differentiated levy of dividends tax, which shows the consistent determination of the regulatory departments to care for the market again, will contribute to remedying the long-standing drawback of "financing outweighing returns" on the market and popularizing the concepts of value investing and rational investment among investors".
Avoiding Double Taxation and Protecting Interests of Small and Medium-sized Investors
As for the actual significance of differentiated levy of dividends tax, Li Xunlei, Chief Economist of Haitong Securities, said, "It is sure to impose a positive impact on the stock market and it is a piece of good news. It is conducive to the formulation of the long-term investment policy on China's capital market besides the establishment of the correct investment philosophy. If the companies do not pay dividends, investors will not get benefits. The policy will also help listed companies administrate their dividend distribution".
Vice President Liu Shengjun of CEIBS Lujiazui Institute of International Finance, who has rich international experience, holds that the differentiated levy or even the cancellation of dividends tax is necessary. "The dividends tax, which is similar to the double taxation, has been exempted from in Hong Kong. From the perspective of encouraging listed companies to pay dividends, the dividends tax should be cancelled. The differentiated levy of dividends tax is obviously a significant step forward", said Liu.
According to sources, the tax system encouraging investors' long-term shareholding has long been established in the USA, the most developed capital market in the world.
Mo said that according to the provisions in the USA, the tax for the short-term capital gains with the shareholding period less than 1 year will be levied at the same rate as the ordinary income tax, with the marginal tax rate up to 35%; the tax for the capital gains with the shareholding period more than 1 year will be levied at the rate of less than 15%. Since 2003, the marginal tax rate for "qualified dividend", one of the essential conditions of which requires that in the 121 days starting from the 60th day prior to the day when the stock goes ex-dividend, the cumulative period of shareholding shall not be less than 60 days, has been significantly reduced in the USA.
In 2005, the Ministry of Finance, the State Administration of Taxation, and the CSRC released the policy of halving the income tax on dividends received by individual investors, in order to elevate investors' confidence and boost the growth of the domestic capital market. However, the policy above which failed to involve differentiated levy according to investors' shareholding periods could not help to foster a concept of long-term investment.
Benefiting Institutional Investors and Propelling Sound Market Growth
If finally released, the policy of differentiated levy of dividends tax will benefit institutional investors such as funds, in addition to individual investors.
The CSRC has been endeavoring to cultivate institutional investors, while the shares held by institutional investors only accounted for 15.6% of the A shares' total market capitalization at the end of 2011.
The policy of differentiated levy of dividends tax can contribute to drawing more long-term-investment-oriented funds to focus on the listed companies with stable dividend distribution apart from lowering the actual tax rate for institutional investors, which will in turn be conducive to elevating the relative valuation of the listed companies with stable dividend distribution and encouraging stable dividend distribution.
Value Investing Encouraged: Blue Chips with High Dividend Rates to Gain Popularity
Apart from its positive influences on investors, the policy of differentiated levy of dividends tax also indicates investment values of the blue chips with high dividend rates, which contributes indirectly to fostering more shares with high dividend rates and blue chips.
Firstly, listed companies generally adopt 3 ways for dividend distribution, namely, cash dividend distribution, bonus share giving, and capitalization from capital public reserve. According to accounting rules, cash dividend distribution and bonus share giving which come from enterprises' undistributed profits should go through the levy of dividends tax (10%), while capitalization from capital public reserve need not to go through the tax levy.
Listed companies prefer to adopt capitalization from capital public reserve for cutting costs. However, if exemption of dividends tax or differentiated levy of dividends tax is implemented to provide similar costs, listed companies will prefer cash dividend distribution for the purpose of protecting interests of key shareholders such as major shareholders.
Secondly, the speculation on small-cap stocks and underperformance shares has been prevailing in China's stock market. Some investors not only neglect fundamental situations of listed companies, but also ignore professional institutions' opinions on valuation and soaring stock prices, which will be harmful for building a good market and creating a sound investment culture.
The irrational investment behavior has led to the deteriorative investment environment, the twisted market structure, and the tremendous waste of social resources. A large amount of capital's crazy chase after small-cap stocks results in the unusually high valuation in the international market. The current price-earnings ratio of CSI 300 Index is less than 11, while those of ST shares reach 40-60. The policy of differentiated levy of dividends tax, which reflects the general thought of regulatory authorities on advocating value investing, will absolutely contribute to increasing the appeal of blue chips and changing the current abnormal price structure in the market.
On the contrary, more long-term-investment-oriented funds will invest in the shares with high dividend rates and blue chips, after which relevant companies' valuation will be elevated, hi-quality funds will expel inferior funds in the market, and more companies will initiatively increase proportions of dividend distribution.
Statistics shows that in 2011, the dividend rate of CSI 300 Index reached 2.34%, higher than that (2.12%) of S&P 500 Index. Some listed companies' dividend rates have remarkably exceeded the one-year bank deposit rate. Especially, the dividend rates of the weight blue chips related to banks, railway companies, and others even reached 5.91%, which showed high investment values.