China Plans to Reinstate Tax on Bond Interest, Potentially Raising $4.4B

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China is planning to reintroduce a tax on bond interest income in a surprising move that could boost government revenue by up to CNY31.6 billion (USD4.4 billion) this year.

Starting August 8, a 6 percent value-added tax will be applied to interest earned from newly issued treasury bills, local government bonds, and corporate bonds. Bonds issued before this date will remain exempt until they mature. Additionally, a preferential policy for small-scale investors will stay in place, allowing individuals to earn tax-free interest income on bond purchases up to CNY100,000 (USD13,930) per month.

This tax exemption was initially implemented in the 1990s to stimulate bond market growth and support fundraising efforts. Today, China’s bond market ranks as the second largest in the world, and officials believe the exemption has served its purpose.

In the first half of the year, fiscal revenue declined by 0.6 percent compared to the previous year, totaling CNY13.5 trillion (USD1.9 trillion). Tax revenue dipped 1.2 percent to CNY9.3 trillion, while government spending increased by 9 percent to CNY18.8 trillion. The fiscal deficit widened by 45 percent to CNY5.3 trillion.

According to Yang Yewei, chief fixed income analyst at Guosheng Securities, this policy change could bring in around CNY31.6 billion (USD4.4 billion) in additional taxes this year. Commercial banks are expected to shoulder the largest portion, around CNY23.3 billion, followed by funds and wealth management products at about CNY3.4 billion.

With planned increases in bond issuance over the next few years, the resulting tax income from this policy is projected to grow significantly—reaching CNY64.8 billion (USD9 billion) in 2024 and CNY98.8 billion in 2027, according to Sun Binbin, chief economist at Caitong Securities.

Last year, China issued CNY12.4 trillion (USD1.7 trillion) in treasury bonds, marking a 12 percent increase from the prior year. Local government bond issuance totaled CNY9.8 trillion (up 5 percent), while corporate bond sales reached CNY10.4 trillion (up 2 percent), based on data from the People’s Bank of China.