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Derivatives

Houses Nervously Await Chinese Tax Moves

Bankers active in China's hottest derivatives instrument, market access products, are anxious over the outcome of regulators' talks about taxing their products.

Bankers active in China's hottest derivatives instrument, market access products, are anxious over the outcome of regulators' talks about taxing their products. Some market participants fear China could slap a 5% tax on the instruments, which would drive up costs and may curtail demand.

The State Administration of Taxation, working alongside the China Securities Regulatory Commission, has told some bankers it may impose a business tax on profits from China A share holdings by qualified foreign institutional investors in the coming months. "This is worrisome," said an equity head in Hong Kong.

How the tax will be levied, however, is not clear. The most confusion arises on how funds of market access products will be taxed. The unanswered question is will the individual investor pay tax when they withdraw their money or will the tax be borne by the fund and passed through to the investors. This would affect the pricing of the fund, noted officials.

Market players said the issue is of most serious consideration to Citigroup, which is launching the A50 China Tracker fund, although many firms are looking to follow Citi's lead. "They need to be quite careful dealing with retail clients," said a rival market player, noting the greater legal ramifications for products geared for individual investors. Citi has spelled out a qualified foreign institutional investor tax risk in the prospectus, but it is unclear from the regulators on how the tax will be applied and if investors would be hit by taxes by other fund holders departing from the Tracker at a profit.

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