Chinese lawmakers Wednesday deliberated a proposal authorizing the State Council to reduce or cancel the tax on interest accrued from deposits.

If the proposal is passed, analysts expect the State Council to halve the current rate to 10 percent first. Should inflation continue to grow, then the cabinet could cancel the tax completely.

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However, there are also calls for the abolition of the tax immediately after the authorization is given.

This move by lawmakers marks the latest attempt to make the real interest rate positive and discourage the diversion of bank deposits to the stock market.

Finance Minister Jin Renqing, in explaining the proposal to the lawmakers, said interest tax has played a positive role in regulating personal incomes and increasing the state's fiscal revenues since it was levied from November 1, 1999.

In the past eight years, the amount of interest tax collected was 214.64 billion yuan in the country.

But Jin said China's financial revenues have maintained a fast growth. Suspending or reducing interest tax won't reduce the country's fiscal revenues. 

Revenues of the central and local governments of China soared almost 24 percent to reach 2.172353 trillion yuan ($285.836 billion) in the first five months of the year, Jin said.

Central government revenue reached 1.220927 trillion yuan, up 298.345 billion yuan year-on-year, while local government revenues reached 951.426 billion yuan, up 210.912 billion yuan.

In 2006, China's national financial revenue totaled 3.93732 trillion yuan. The national financial expenditures totaled 4.042273 trillion yuan, said the minister.

Currently, the benchmark one-year deposits carry an interest rate of 3.06 percent. However, given the 20 percent interest tax, the actual yield is just 2.45 percent.

That return is well below the inflation rate as measured by the consumer price index, which hit a two-year high of 3.4 percent after rising 3.0 percent in April and 3.3 percent in March.

If the real interest rate remains negative for a long time, it will do no good to the economy, said assistant central bank governor Yi Gang during the weekend.

The negative interest rate is encouraging a massive diversion of bank deposits to the equity market, which has soared 50 percent so far this year after a 130 rally in 2006.

China's household deposits posted the largest monthly drop in May, decreasing 278.4 billion yuan, according to central bank statistics.

The central bank has raised interest rates twice this year and is widely expected to annouce two more hikes before the end of year. However, analysts argue that the interest tax has an negative effect on the rates increases, therefore should be abolished or reduced.

Word on interest tax adjustment has affected the stock market for several days. The Shanghai Composite Index, the most widely watched indicator of the mainland equity market, dropped 3.68 percent on Friday before tumbling a further 3.29 percent on Monday.

China started to collect interest tax in November 1999 in hope of boosting domestic consumption through discouraging deposits. But that aim has largely failed due to the lack of an eligible social security network in the country.