Hong Kong’s Finance Minister, Paul Chan Mo-po, cautioned that reducing the tax on securities trading might not necessarily revive the city’s sluggish stock market. This warning comes as discussions about a potential stamp duty reduction on securities have been widespread since a 13-member task force was established last week.
Hong Kong’s stock market performance unsatisfactory
Chan emphasized that the recently established task force would comprehensively examine the underlying factors contributing to the stock market’s lackluster performance to develop appropriate measures to address structural issues. He supported his argument with statistical evidence, suggesting that even a lower stamp duty might not resolve the market’s problems or stimulate sustained turnover. In this context, turnover measures the liquidity of stocks based on the volume of shares traded in a day.
Pointing to an 8% decline in the Hang Seng Index during August, with daily average turnover at around HK$100 billion (US$12.7 billion), Chan expressed his concerns about the unsatisfactory performance of Hong Kong’s stock market in his weekly blog. He noted that despite calls in the market for reducing stamp duty, historical data has indicated that such reductions may not effectively address the underlying structural issues and generate sustained turnover.
Furthermore, he cautioned against taking piecemeal stimulus measures, suggesting they could fail to invigorate the market and further erode investor confidence.
Last Tuesday, the government announced the formation of a task force led by securities regulatory veteran Carlson Tong Ka-shing. The task force examines stock market liquidity, which includes scrutinizing the listing regime, market structure, and trading mechanisms, all aimed at enhancing Hong Kong’s position as a global financial hub.
Chan mentioned that the task force would leverage the insights and expertise of financial experts and regulatory professionals to assess the strengths and challenges of Hong Kong’s stock market. He also noted that the task force members would convene for this week’s meeting.
Hong Kong contemplates stamp duty reduction amid mixed perspectives
In response to mainland China’s recent decision to boost trading on its stock exchanges by reducing stamp duties to 0.05%, some local stockbrokers and notable figures in the financial sector, such as Executive Council convenor Regina Ip Lau Suk-yee, have advocated for a similar approach in Hong Kong.
In 2021, Hong Kong increased the stamp duty on the trade value for buyers and sellers in all share transactions by 30%, raising it to 0.13%, marking the third increase since 1998. Chan pointed out that in 2021, during the initial months following the increase in stamp duty, specifically between August and December, the average daily turnover of securities trading saw a 2% year-on-year increase.
He also noted that the turnover rate of stocks rose from 0.22% in 2020 to 0.27% in 2022, with the higher rate indicating more active trading. However, he acknowledged that various factors influence stock trading activities, including geopolitics and market sentiment.
As stated by Chan, the task force’s objectives include reviewing external and internal factors such as the listing regime, market structure, and trading mechanisms. They aim to explore ways to diversify sources of funding and funding streams, attract high-quality enterprises to go public on the stock market, introduce innovative investment products, and increase the turnover rate of stocks.
Chan highlighted that investors’ appetite for the stock market is influenced by factors such as a company’s fundamentals, including its business performance and potential for growth.
Meanwhile, Suk-yee stated that while reducing stamp duty alone may not completely transform the market, it would boost investor sentiment and signal the government’s responsiveness. She also pointed out that a prolonged period of low market turnover could ultimately depress stamp duty revenue, emphasizing the need for broader macroeconomic measures to stimulate the economy beyond initiatives like issuing consumption vouchers.
On the other hand, lawmaker Robert Lee, a newly formed task force member, stood by his call for a stamp duty reduction but acknowledged that it wouldn’t address all the market’s challenges, particularly those related to high interest rates and geopolitical factors. He believed that the government’s primary concern was its financial stability.
These comments align with the perspective of a source close to the government, who indicated that reducing stamp duty might not be favored as it could negatively impact public finances. The government has estimated that lowering the stamp duty rate to 0.1% or zero could result in revenue reductions of HK$12.3 billion or HK$53.1 billion, respectively, which would account for around 2% or 9% of the overall revenue for the year 2022-23, based on actual stamp duty revenue.
