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China reinstates tax on bond interest income and steps up enforcement of income tax on overseas investments gains;

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Here’s what you need to know about China in the past 24 hours 

China plans to reintroduce tax on bond interest income in a surprise move that could boost government coffers by as much as CNY31.6 billion this year. 

A 6 percent value-added tax will be levied on interest income from newly issued treasury bills, local government bonds, and corporate notes from Aug. 8, according to the Ministry of Finance and the State Taxation Administration. 

Bonds sold before Aug. 8 will remain exempt until maturity. The preferential policy for “small” taxpayers will also be retained, allowing individuals to earn VAT-free interest income on bond purchases up to CNY100,000 a month. 

The tax exemption on interest income was introduced in the 1990s to spur growth of the bond market and aid fundraising. China’s bond market is now the world’s second largest, and officials have said that the exemption has fulfilled its purpose.

The government tax take may increase by about CNY31.6 billion this year following the move, according to calculations by Yang Yewei, chief fixed income analyst at Guosheng Securities.

Given that new bond issuance is set to increase in the next few years, the tax income from the new policy will also mount, growing to CNY64.8 billion next year and CNY98.8 billion in 2027, according to Sun Binbin, chief economist at Caitong Securities. 

Meanwhile, China is stepping up the enforcement of a long-standing policy requiring residents to pay personal income tax on gains accruing from overseas investments.

Social media platforms in China saw a surge in posts from investors sharing tax payment notices, many of which refer to a 20 percent personal income tax on overseas investment income such as dividends and capital gains. Investment in the Hong Kong Stock Exchange via the Stock Connect will remain exempt from income tax until the end of 2027. 

The increased enforcement coincides with the expansion of China's golden tax phase IV system, a robust data analytics platform that compares invoices, bank transactions, contracts and other relevant data to identify discrepancies and signs of tax evasion, and its integration with the Common Reporting Standard, an international framework for the automatic exchange of financial account information.

The CRS system now enables Chinese tax authorities to access offshore financial data from more than 100 countries and regions, with coverage expected to grow to over 150 jurisdictions by 2025.

The tightening of tax policies on overseas investment could trigger a series of ripple effects for China's A-share market. Some investors may keep their funds within the Chinese mainland, which will support the stable development of A-shares, experts noted.

GBA express

The Hong Kong Stock Exchange (HKEX) has introduced significant reforms to its IPO pricing mechanism, which came into effect on Monday. The reforms focus on several key areas, including optimizing the allocation ratio for share placements, lowering the public float threshold, and facilitating issuers with dual listings on the A-share and H-share markets (A+H issuers), according to the HKEX.

The Hong Kong Monetary Authority (HKMA) bought HK$6.429 billion of the local currency on Tuesday, in addition to its purchases on Aug 1 and July 30. The resumption of currency intervention underscores the persistent depreciation pressure on the Hong Kong dollar, as the city’s wide interest-rate gap with the US spurs traders to short the local currency in favor of the higher-yielding greenback.

On Tuesday, torrential rain continued to batter multiple cities across southern China. Shenzhen issued its first citywide red rainstorm alert since 2018, while Hong Kong announced its fourth highest-level black rainstorm warnings within a single week. Huizhou also raised its rainstorm alert to red at 2:28 am on Tuesday, while Macao issued a black rainstorm warning at 8:18 am and extended it until 12 noon.

Industry and company news

JD.Com will launch its first five large-scale discount supermarkets in China's Jiangsu and Hebei provinces this month, media reported today. The Zhuozhou store in Hebei will span 5,000 sqm and offer over 5,000 cost-effective goods priced below the market average. On the other hand, Alibaba’s grocery chain Freshippo is shutting its X Membership Stores, with the final location in Shanghai to close on Aug. 31. Shops in Beijing, Suzhou, and Nanjing have already closed.

Chinese EV brand Neta Auto announced yesterday that potential investors interested in joining the restructuring of its owner Hozon Auto should pay a deposit of CNY50 million before 5 p.m. on Sept. 15. Fifty-three entities have submitted applications so far, according to Alibaba's asset disposal platform.

Pony.ai has teamed up with Jinjiang Taxi to roll out robotaxi services in Shanghai's Pudong district, covering Jinqiao and Huamu areas, since Aug. 1, the Chinese autonomous driving firm said today. A robotaxi can be hailed using Pony.ai's app or WeChat mini program anytime between 7.30 a.m. and 9.30 p.m. on weekdays.

Baidu and Lyft yesterday announced a strategic partnership to bring Baidu’s Apollo Go autonomous vehicles to key European markets through Lyft’s platform. The first launches are planned for Germany and the UK next year, with the fleet expected to expand to thousands of units across Europe in the following years.

China's foreign trade in services jumped 8 percent in the first half from a year earlier to CNY3.89 trillion, with knowledge-intensive services accounting for 38.7 percent of the total, according to data released by the Ministry of Commerce yesterday. Specifically, service exports rose 15 percent to CNY1.69 trillion, while imports increased 3.2 percent to CNY2.2 trillion.