China should raise the threshold of individual income tax and reduce interest tax on savings deposits, a committee under the nation's legislature suggested on Wednesday.

The fiscal measures could stabilize consumption by increasing people's actual income and prevent a sharp slump in economic growth, said the report by the Financial and Economic Affairs Committee of the National People's Congress.

China raised the threshold of individual income tax from 800 yuan (US$117.3) to 1,600 yuan in 2006 to alleviate the tax burden on the poor. The move exempted more than 20 million people from paying personal income tax.

Last year, the State Council also suggested cutting or even cancelling the 20 percent interest tax on savings because of a real negative rate against rising consumer prices.

China's Consumer Price Index, the main gauge of inflation, settled at 7.9 percent in the first half of this year.

The committee under the NPC stressed the risks of slower export growth and people's severed consumption power in the second half of the year.

"The weaker external demand, the rising cost of primary commodities, the fast appreciation of the yuan and the tight credit control at home will create serious challenges for China's overseas sales," said the report.

In the first half, China's exports expanded 21.9 percent to US$666.6 billion, down 5.7 percentage points from a year earlier.

Some heavy export provinces like Guangdong Province suffered a big drop in trade growth while labor-intensive industries, including textiles, plastic products and toys, fell sharply. The sector of garments even posted a negative growth in May.

People's consumption power also showed a tendency to decrease despite rapidly expanding retail sales.

"More expensive goods partly contributed to the rise of retail sales. The expectation of inflation is still high on the market, making people reluctant to spend, which is shown in the sluggish property and automobile markets," said the report.

It said China has been under strong pressure to increase domestic fuel and electricity prices as they remained lower than that on the global market.

The committee also said China needed to better manage its exchange rate to curb the inflow of speculative capital, as it will stoke inflation and destabilize the financial system should there be sudden fund withdrawal.

(Shanghai Daily July 24, 2008)