China Financials: Discussion of government bond taxation: manageable earnings impact

Bloomberg reported on November 11 that the PBOC surveyed banks last month on how a potential 25% income tax on interest from central and local government bonds would affect their willingness to hold these securities. The issue has been discussed for some time without a final decision, and the latest reported survey indicates that authorities are still assessing market responses. If taxation is introduced, we expect existing bonds to retain their exemption, with the tax applying only to new issuance, although this remains unconfirmed. Under this scenario, the earnings impact would build gradually over many years as portfolios turn over, and higher yields on taxable new bonds should compensate for part of the tax burden. Under a scenario of a 15bps government bond yield increase following the levy of income tax, annual net profit would fall 0.3% to 0.9% for banks under our coverage; under a 30bps yield increase, the impact is only 0.1% to 0.3%. Higher government borrowing costs could par