HONG KONG – Hong Kong’s main index doesn’t seem to be getting broke.
Just as the stars seemed to be aligned for the worst performing stock index in 2020, with the highest inflows of money on the mainland and impshake- upshakeup in Hang Seng Index added to the rising relevance of the sought-after new economy stock, the government has shaken investor sentiment in recent days with plans to raise the city’s trade tax for its for the first time in 28 years
The increase, which will be implemented in August, is a whopping 30% – bringing the rate from 0.1% of trade value to 0.13%. Investors fear that more could come as Hong Kong is facing years of budget deficits due to the costs of dealing with the coronavirus pandemic.
Four Nikkei Asia analysts spoke of the expected 5% to 10% fall in stock trading in Hong Kong as a result of the tax hike, although they expect overall liquidity and the health of the global economy to remain critical to market outlook . .
“The tax increase will take some shine from the biggest revamp of the Hang Seng Index in years,” said Kenny Wen, wealth management strategy at Everbright Sun Hung Kai. “It has affected the short-term sentiment of the market and investors are afraid of further such increases.
“However, the fee is only one part of the cost to investors and over the medium and long term, more technology names will only help index growth.”
The compiler of Hong Kong’s main stock index said on Friday that as part of its regular quarterly review, it will add three companies, including Alibaba Health Information Technology, to the rod- their measure, bringing the number of electors to 55 from 15 March.
On Monday, it is expected to announce the result of a consultation on its proposal to hang Hang Seng, the market benchmark for 52 years. The number of voters, held at 50 until November last year, could rise to 65 or as many as 80 among a deluge of Chinese listing companies in the region. The exercise could also cut weight in the index for financial stocks from 43% to around 33%, while at the same time giving more weight to technical stocks.
The index has been in its infancy to year since 1989, driven by the purchase of charts from Chinese investors through the stock linking program, which allows them to buy shares on the city’s exchange. They bought $ 54 billion this year through Feb. 23, compared to $ 83 billion for 2020 as a whole.
The mainland’s background allowed the index, still under severe pressure on finance and property stock, to close the gap against peers such as China’s MSCI index, which includes land-based companies -listed listed in Hong Kong, Shanghai and Shenzhen, as well as foreign exchanges such as the Nasdaq Stock Market.
Hang Seng Renewal intends to make the index more representative of the stocks listed in Hong Kong and a better substitute for Chinese listed companies.
However, on February 24, the day the government announced a trade tax increase, the buying spree was broken and the Hang Seng recorded the steepest dip since May. Mainland investors turned net sellers of Hong Kong shares for the first time since Dec. 18, dumping $ 19.95 billion worth of Hong Kong dollars ($ 2.6 billion).
The index fell 5.2% last week, the biggest decline in a year.
The Hong Kong government is looking at the highest fiscal deficit of HK $ 257.6 billion for the fiscal year ended March 31 and HK $ 101.6 billion for the next year. Finance Secretary Paul Chan said the decision to lift the trading tax levied on stock trading, known as stamp duty, was taken after the impact on the securities market and competitiveness international city.
“On the mainland, yes, their stamp duty is lower, but they charge for other things, [and] there is also foreign exchange control. Here in Hong Kong, free capital is flowing [and] we have a market that is both huge in depth and breadth, “he told a meeting of the Finance Committee of the Legislative Council” So even if we increase the stamp duty … we will still be very competitive. “
The tax hike “shows that the city’s strong capital markets and IPO activities could offer a quick fix to increase short-term tax revenue,” said Stanley Ho, corporate tax advisory partner at KPMG China .
“However, it is also important that Hong Kong ‘s capital markets remain competitive with global financial markets, many of which are in the process of reducing or eliminating such obligations. the future introduction of taxes with careful review and as much consensus as possible with the community. “
Investors in the US or Japan do not have such a trading tax, although the UK raises 0.5% on the purchase and sale of shares. Unlike many of its peers, Hong Kong also does not tax capital gains or shares.
Total stock market volumes in Hong Kong rose 49% in 2020 and so far in 2021, trading volumes have risen to double the levels of 2020, according to CCB International Securities.
Hong Kong has also benefited from a jump in new listings, partly led by Chinese U.S.-registered companies seeking a secondary backing position amid rising tensions between Beijing and Washington.
Companies have raised $ 8.4 billion in Hong Kong so far this year, according to Dealogic. This follows an increase of more than $ 52 billion in 2020, when the Hong Kong Stock Exchange only traded the New York and Nasdaq Stock Executives globally.
Since 2018, 37 companies on the U.S. list have been building positions on the Hong Kong exchange. The combined market value of $ 1.4 trillion represents a quarter of Hong Kong’s stock market capitalization.
The proposed changes to the target criterion aim to keep it relevant. Companies that make up the Hang Seng represent 57.6% of the city’s total stock market value, down from 65% at the end of 2016.
The increase in trade tax hurts high-frequency and volume traders, which currently make up one-tenth of books and could encourage institutional investors to make more use of derivatives contracts. which is exempt from such a tax.
While the tax is not large enough to stop the speed of secondary listings, it could delay a build-up in trading volumes for such stocks in Hong Kong, weakening efforts to build liquidity .
The increase in the business tax alone is not “enough to cause liquidity to flow back to the U.S., but the pace of the shift from American Investment Receipts to central Hong Kong-registered shares could,” UBS analysts said Kelvin Chu and Sam Tang in an investor’s note, citing fund managers converting U.S. traded securities of Chinese companies to Hong Kong versions.