China has announced plans to begin taxing interest income earned on bonds | investingLive

In a surprise policy shift, China has announced plans to begin taxing interest income earned on bonds issued by the government and financial institutions—a move that marks a significant departure from decades of tax exemption in the country’s bond market.

The announcement has caught investors off guard, prompting a swift reassessment of fixed income portfolios amid concerns about lower after-tax returns. The new tax policy could dampen demand for Chinese sovereign and policy bank debt, particularly among institutional investors who had relied on the tax-free status to enhance yield.

While the full implementation details have yet to be released, the move signals Beijing’s growing focus on broadening its tax base, even as it risks unsettling already fragile investor sentiment in domestic debt markets.

More:

• collecting tax starting August 8
• tax exemption that has been in place since the 1990s
• surprise policy change affects nearly 70% of China’s total bond market by outstanding amount
• analysts estimate that with the general 6% value-added tax rate, the policy will introduce investment costs for newly-issued bonds and widen the yield gap between existing and new bonds by approximately 5-10 basis points