Liquidity king and capital gain tax

Cheming Yang

According to a report of the Standard Chartered Bank, the People’s Bank of China (PBC), China’s central bank, has become the king of global liquidity with its total assets topping 28 trillion yuan (about 4.5 trillion dollars) by the end of 2011. The PBC had seen a 118 percent rise over the past five years. Chinese M2 was up 146% over the past five years to 85.2 trillion yuan (13.8 trillion dollars) and China accounted for 52% of the world’s new M2 in2011. PBC has become the world’s number one both in terms of the stock of M2 money and newly-added M2 money. The crown of major global liquidity provider has been taken away from the traditional central lender, such as the U.S. or the Europe.

At the same time across Taiwan strait, Taiwanese government is planning on taxing the capital gains such as money earned from the trading of stock and real estate in light of the threats of inflation and growing inequality in income. Currently, capital gain from stock investment is not taxed at all in Taiwan. Although the gains from selling real estate are taxed in Taiwan, they are not taxed at the transactional prices instead at much lower appraisal prices published by the government annually according to past practices. As such, the real estate market becomes a hot bed for speculation.

The housing markets in mainland China, Hong Kong and Taiwan are sizzling. Although all governments have tried various measures to chill the real estate markets, the effects are quite negligible. And this phenomenon can be explained partly by the fact that Chinese have hold in hands the majority of liquidity in the world. It is certainly not a disadvantage to be rich and it is not a crime to have a lot of cash. The question is whether cash can bring the owner better life. Because of the threats of inflation and rising housing costs, most people are not happy according to many surveys.

When the country as a whole have a lot of cashes at hand and the rich people can only invest in things that make the rest of their fellow countrymen miserable, this means that there are big problems in the market systems. Do we allow the cash to flow into somewhere it shouldn’t be let in? Do we have the ability to direct the money to where it should be going? Is there such a place? We really needs to think hard about how to deal with the influx of cash. Otherwise, only few smile and the majority suffer.

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