China seeks feedback on bond trade tax changes

SHANGHAI, Nov 12 - China's State Administration of Taxation is seeking suggestions from the industry on standardising the basis of different types of bond trading on how they will be taxed, which may dampen trading activity, several sources told Reuters.

The final rules, to be announced soon, will include clarifications on how trading of outright bond repurchases will be taxed -- whether an outright repo agreement should be taxed as one fund-raising contract or as two, the sources said.

A banker in eastern China believes that the final rules will likely tax a repo business as two contracts, hurting trading activity there.

In a repo, the borrower agrees to sell a financial security, such as a government bond, to a lender and also agrees to buy the same security from the lender at a fixed price at a later date for the purpose of short-term fund raising.

The volume of outright repo transactions in China's interbank market reached 2.2 trillion yuan ($323 billion) in the first 10 months of this year, including 122 billion yuan in October. ($1 = 6.82 yuan)