China Banks: Our take on potential 25% tax on China government bond interest income; Implications on China banks

According to Bloomberg (source, 10 Nov), in the last month, PBoC has required selective China banks to indicate the negative impact on new central/local government bond subscriptions (i.e., in the range of <10% / 20% / 30% / >30%) if a tax rate of 25% (vs. tax-exempted currently) is imposed on the interest income of these investments. The survey does not indicate whether or when existing policies will be adjusted. Given the tax initiative should only be applied on new issuance (but not existing government bonds), we believe investors would accelerate allocation to existing government bonds to avoid the regulatory uncertainty, driving the bond yield for existing China government bonds lower, while the yield for newly issued government bond should go up by 15-20bps to partially compensate for the negative tax payment impact. Based on our static analysis, without considering any offsetting factors, the tax payment will hurt China banks' earnings for five years with c.2-3% negative earning