Easy Money >>> FOREX

You can blame China’s uncertain market on the government.

Chinese officials on Wednesday debated a plan that gives China’s State Council the power to cut or cancel its tax on bank deposit interest. The 20% tax was imposed in November 1999 to boost spending after the Asian financial crisis.

Although the tax is a huge cash cow for the country’s national government it collected more than $28 billion from the tax as of 2006 it’s a pain in citizens’ backsides.

It’s also the main reason that the Chinese stock market has been on a tear. Citizens would much rather put their money into stocks and see the returns than pay the deposit tax.

But with the tax eased or even removed, putting money into banks would be less risky and more attractive for Average Joe China.

Decision Pending

The Chinese central government said the proposal would be studied and a decision delivered Thursday. Although it’s fallen from its all-time high May 29, the benchmark Shanghai Composite Index has climbed 49.5% this year after soaring 130% last year. While the tax beefed up consumption and investment and added financial revenue, China’s fast growth in fixed-asset investment and growing inflation means it needs a new approach, economists say. The composite rose 2.65% Wednesday to 4079 at news of the proposal.

The three main Chinese exchange traded funds also picked up slightly at the news. One of the biggest, iShares FTSE/Xinhua China 25 Index, () had seen a slight pullback over the past week but rose 1.36% to 127.74 on thin volume Wednesday. SPDR S&P China, () which debuted in March and also tumbled in the past few days, inched up almost 1% to 66.49.

The third fund, PowerShares Golden Dragon Halter USX China Index, () rose 0.26% to 25.26.

Relief Rally

The slight boost Wednesday is likely the result of relief at the news of both the tax cut and a bond issue by China’s Ministry of Finance, analysts said. If the $200 billion bond issue goes directly to the People’s Bank of China, there won’t be an effect on liquidity and the markets. But if the bonds go to market, the reserve ratio will rise and further reduce excess liquidity.

With the top holdings of all three ETFs heavy in Chinese telecom, financial and energy companies, it’s uncertain how the two policy shifts will affect them. Such companies are interest-rate sensitive; financial companies, for instance, hold the loans for Chinese makers of consumer and infrastructure products.

With 25 stocks and $4.9 billion in assets, the FTSE/Xinhua fund has half of its top 10 holdings in financial or telecom, including giant China Life Insurance. ()

The fund is up 55% for the year and has a sturdy IBD Relative Strength Rating of 90.