China’s unexpected move to cut its stock trading tax is adding pressure on Hong Kong to follow suit, creating a dilemma for the city’s finance chief over the potential hit to government income.
Bankers and traders have long been asking for a reduction, but now Hong Kong’s biggest political party, the Democratic Alliance for the Betterment and Progress of Hong Kong, has joined the calls to revive trading in the Asian financial hub. The cost would be significant as the government relies on revenue from stock trading for about 9% of its budget.
The aggressive moves by Beijing to support markets are speeding up plans for Hong Kong to come up with its own measures to revive activity of trading and initial public offerings. After working in the background since April, sounding out experts and regulators, Financial Secretary Paul Chan has fast-forwarded plans, according to people familiar with the matter.
The city last month unveiled an ad-hoc task force led by Carlson Tong, a former regulator and retired KPMG China chairman, and comprised of executives from Morgan Stanley, Citigroup Inc. and CSOP Asset Management Ltd. among others. The group is expected to meet once a week or more to draft a preliminary action plan within this month ahead of Chief Executive John Lee’s annual Policy Address in October, the people said.
At its first meeting on Wednesday, the task force examined data and analysis on market liquidity and investor costs, according to a statement from Tong. The discussion doesn’t exclude a potential stamp duty cut, he said.
The speedy timetable is unusual for a Hong Kong consultation process, said Lyndon Chao, head of equities and post trade at the Asia Securities Industry & Financial Markets Association, representing over 165 banks and brokers in the region.
“The timing seems aligned with the chief executive’s annual address but perhaps catalyzed by the growing concerns about market sentiment and liquidity,” Chao said.
A government spokesman said in a statement that the task force “will hold additional meetings with a view to making short-term recommendations to the Chief Executive shortly.”
The stamp duty has been heavily debated in Hong Kong over the past weeks and China’s cut gave backing to those calling for a reduction. After the stamp duty was raised in 2021, a study by the Financial Services Development Council showed the financial hub was the most expensive to trade in after only the UK. Many major exchanges in countries such as the US and Japan don’t impose such a levy on stock trading.
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Before China slashed its stamp duty in half, city officials had said it had little impact on overall stock trading volumes. Even after the task force was formed, Chan on Sept. 3 said in a weekly blog post that cutting the stamp duty won’t be enough stimulate long-term trading. He then clarified his position the next day saying that a reduction can’t be ruled out.
Cutting the duty to pre-2021 level of 0.1% or eliminating it all together would cost HK$12.3 billion ($2.14 billion) and HK$53.1 billion in revenue, respectively, according to an official estimate in July.
Concern over China’s sputtering economy has hit the city’s markets, with IPOs plummeting since 2021 and trading slumping. Average daily trading on the city’s exchange fell 16% in the first half of 2023 from a year earlier. Total equity funds raised declined 35% in the first six months.
Foreigners are also losing interest in the financial hub’s markets. Overseas institutions’ participation dropped to some 25% of Hong Kong’s equities market as of August from nearly 40% at the end of 2020, according to a report by Morgan Stanley.
The task force “leverages the collective wisdom of the industry, market and regulators, and helps examine the strengths and challenges of Hong Kong’s stock market,” the government spokesman said. “The Task Force will propose short, medium and long-term proposals for the Government’s consideration, with a view to enhancing the stock market’s competitiveness and unleashing its development potential.”
Hong Kong public finance remains strong and healthy, the city’s top treasury official, Christopher Hui, told reporters last week. The stamp duty was “only one of the income sources,” he said.
The government hasn’t handed out a pre-determined list to the group and will be open-minded to its recommendations, according to two of the people, who asked not to be identified discussing a private matter.
“Each and every member brings their wealth of experience and perspective to the group,” said Robert Lee, a task force member and a lawmaker representing financial services and manager of local brokerage Grand Finance Group. “We discuss what is best for the market frankly and fairly, regardless of our background.”
